UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2023
or
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-13754
THE HANOVER INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware |
04-3263626 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
440 Lincoln Street, Worcester, Massachusetts 01653
(Address of principal executive offices) (Zip Code)
(508) 855-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
|
Trading Symbols |
|
Name of each exchange on which registered |
Common Stock, $.01 par value |
|
THG |
|
New York Stock Exchange |
7 5/8% Senior Debentures due 2025 |
|
THG |
|
New York Stock Exchange |
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|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
☒ |
Accelerated filer |
☐ |
Non-accelerated filer |
☐ |
Smaller reporting company |
☐ |
|
|
Emerging growth company |
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant’s common stock was 35,726,224 as of May 1, 2023.
TABLE OF CONTENTS
PART I. |
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2 |
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Item 1. |
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2 |
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2 |
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3 |
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4 |
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5 |
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6 |
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7 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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22 |
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Item 3. |
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38 |
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Item 4. |
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38 |
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PART II. |
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39 |
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Item 1. |
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39 |
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Item 1A. |
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39 |
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Item 2. |
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41 |
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Item 6. |
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42 |
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43 |
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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Three Months Ended |
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|||||
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March 31, |
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|||||
(In millions, except per share data) |
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2023 |
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2022 |
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Revenues |
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Premiums |
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$ |
1,380.0 |
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$ |
1,263.8 |
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Net investment income |
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78.7 |
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76.9 |
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Net realized and unrealized investment gains (losses): |
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Net realized gains (losses) from sales and other |
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(1.1 |
) |
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3.0 |
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Net change in fair value of equity securities |
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(7.1 |
) |
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(18.0 |
) |
Impairments on investments: |
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Credit-related impairments |
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(4.5 |
) |
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(0.6 |
) |
Losses on intent to sell securities |
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(10.3 |
) |
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(0.3 |
) |
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(14.8 |
) |
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(0.9 |
) |
Total net realized and unrealized investment losses |
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(23.0 |
) |
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(15.9 |
) |
Fees and other income |
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8.0 |
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5.9 |
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Total revenues |
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1,443.7 |
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1,330.7 |
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Losses and expenses |
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Losses and loss adjustment expenses |
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|
1,017.4 |
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787.5 |
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Amortization of deferred acquisition costs |
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|
288.8 |
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262.9 |
|
Interest expense |
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8.5 |
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8.5 |
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Other operating expenses |
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146.5 |
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141.8 |
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Total losses and expenses |
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1,461.2 |
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1,200.7 |
|
Income (loss) from continuing operations before income taxes |
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(17.5 |
) |
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130.0 |
|
Income tax expense (benefit): |
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Current |
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2.2 |
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30.2 |
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Deferred |
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(7.7 |
) |
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(5.5 |
) |
Total income tax expense (benefit) |
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(5.5 |
) |
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24.7 |
|
Income (loss) from continuing operations |
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(12.0 |
) |
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105.3 |
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Discontinued operations (net of taxes): |
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Loss from discontinued life businesses |
|
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— |
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|
|
(0.4 |
) |
Net income (loss) |
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$ |
(12.0 |
) |
|
$ |
104.9 |
|
Earnings per common share: |
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Basic: |
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Income (loss) from continuing operations |
|
$ |
(0.34 |
) |
|
$ |
2.96 |
|
Discontinued operations (net of taxes): |
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Loss from discontinued life businesses |
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— |
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(0.01 |
) |
Net income (loss) per share |
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$ |
(0.34 |
) |
|
$ |
2.95 |
|
Weighted average shares outstanding |
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35.6 |
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35.5 |
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Diluted: |
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Income (loss) from continuing operations |
|
$ |
(0.34 |
) |
|
$ |
2.91 |
|
Discontinued operations (net of taxes): |
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||
Loss from discontinued life businesses |
|
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— |
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(0.01 |
) |
Net income (loss) per share |
|
$ |
(0.34 |
) |
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$ |
2.90 |
|
Weighted average shares outstanding |
|
|
35.6 |
|
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36.1 |
|
The accompanying notes are an integral part of these interim consolidated financial statements.
2
THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
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Three Months Ended |
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|||||
|
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March 31, |
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|||||
(In millions) |
|
2023 |
|
|
2022 |
|
||
Net income (loss) |
|
$ |
(12.0 |
) |
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$ |
104.9 |
|
Other comprehensive income (loss), net of tax: |
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Available-for-sale securities: |
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Changes in net unrealized gains (losses) on investment securities: |
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Having no credit losses recognized in the |
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93.3 |
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(379.4 |
) |
Having credit losses recognized in the |
|
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1.0 |
|
|
|
(0.5 |
) |
Total available-for-sale securities |
|
|
94.3 |
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(379.9 |
) |
Pension and postretirement benefits: |
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Net change in net actuarial loss |
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1.6 |
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1.1 |
|
Long-duration insurance contracts: |
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Net change in market risk |
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(2.1 |
) |
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6.9 |
|
Total other comprehensive income (loss), net of tax |
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93.8 |
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|
|
(371.9 |
) |
Comprehensive income (loss) |
|
$ |
81.8 |
|
|
$ |
(267.0 |
) |
The accompanying notes are an integral part of these interim consolidated financial statements.
3
THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
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March 31, |
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|
December 31, |
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(In millions, except share data) |
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2023 |
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2022 |
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Assets |
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Investments: |
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Fixed maturities, at fair value (amortized cost of $8,373.2 and $8,294.5) |
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$ |
7,678.2 |
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$ |
7,481.8 |
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Equity securities, at fair value |
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234.8 |
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241.9 |
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Other investments |
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795.0 |
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|
786.1 |
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Total investments |
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8,708.0 |
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8,509.8 |
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Cash and cash equivalents |
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181.5 |
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305.0 |
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Accrued investment income |
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53.9 |
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54.5 |
|
Premiums and accounts receivable, net |
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1,600.4 |
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1,601.4 |
|
Reinsurance recoverable on paid and unpaid losses and unearned premiums |
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|
1,972.7 |
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1,964.5 |
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Deferred acquisition costs |
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597.8 |
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604.8 |
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Deferred income tax asset |
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|
181.0 |
|
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|
199.2 |
|
Goodwill |
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178.8 |
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|
178.8 |
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Other assets |
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530.2 |
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|
493.0 |
|
Assets of discontinued businesses |
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87.4 |
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|
84.1 |
|
Total assets |
|
$ |
14,091.7 |
|
|
$ |
13,995.1 |
|
Liabilities |
|
|
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Loss and loss adjustment expense reserves |
|
$ |
7,143.4 |
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$ |
7,012.6 |
|
Unearned premiums |
|
|
2,969.2 |
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|
2,954.2 |
|
Expenses and taxes payable |
|
|
618.6 |
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|
731.7 |
|
Reinsurance premiums payable |
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|
76.2 |
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70.3 |
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Debt |
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|
782.6 |
|
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|
782.4 |
|
Liabilities of discontinued businesses |
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|
112.7 |
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110.2 |
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Total liabilities |
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|
11,702.7 |
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|
11,661.4 |
|
and contingencies |
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Shareholders’ Equity |
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Preferred stock, par value $0.01 per share; 20.0 million shares authorized; none issued |
|
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Common stock, par value $0.01 per share; 300.0 million shares authorized; |
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|
0.6 |
|
|
|
0.6 |
|
Additional paid-in capital |
|
|
1,913.6 |
|
|
|
1,913.1 |
|
Accumulated other comprehensive loss |
|
|
(607.7 |
) |
|
|
(701.5 |
) |
Retained earnings |
|
|
2,951.6 |
|
|
|
2,992.9 |
|
Treasury stock at cost (24.8 million and 24.9 million shares) |
|
|
(1,869.1 |
) |
|
|
(1,871.4 |
) |
Total shareholders’ equity |
|
|
2,389.0 |
|
|
|
2,333.7 |
|
Total liabilities and shareholders’ equity |
|
$ |
14,091.7 |
|
|
$ |
13,995.1 |
|
The accompanying notes are an integral part of these interim consolidated financial statements.
4
THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES
|
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Three Months Ended |
|
|
|||||
|
|
March 31, |
|
|
|||||
(In millions) |
|
2023 |
|
|
2022 |
|
|
||
Preferred Stock |
|
|
|
|
|
|
|
||
Balance at beginning and end of period |
|
$ |
— |
|
|
$ |
— |
|
|
Common Stock |
|
|
|
|
|
|
|
||
Balance at beginning and end of period |
|
|
0.6 |
|
|
|
0.6 |
|
|
Additional Paid-in Capital |
|
|
|
|
|
|
|
||
Balance at beginning of period |
|
|
1,913.1 |
|
|
|
1,887.2 |
|
|
Employee and director stock-based awards and other |
|
|
0.5 |
|
|
|
0.6 |
|
|
Balance at end of period |
|
|
1,913.6 |
|
|
|
1,887.8 |
|
|
Accumulated Other Comprehensive Income (Loss), net of tax |
|
|
|
|
|
|
|
||
Net Unrealized Appreciation (Depreciation) on Investments: |
|
|
|
|
|
|
|
||
Balance at beginning of period |
|
|
(641.4 |
) |
|
|
184.9 |
|
|
Net appreciation (depreciation) on available-for-sale securities |
|
|
94.3 |
|
|
|
(379.9 |
) |
|
Balance at end of period |
|
|
(547.1 |
) |
|
|
(195.0 |
) |
|
Defined Benefit Pension and Postretirement Plans: |
|
|
|
|
|
|
|
||
Balance at beginning of period |
|
|
(64.1 |
) |
|
|
(62.7 |
) |
|
Net amount recognized as net periodic benefit cost |
|
|
1.6 |
|
|
|
1.1 |
|
|
Balance at end of period |
|
|
(62.5 |
) |
|
|
(61.6 |
) |
|
Long Duration Insurance Contracts: |
|
|
|
|
|
|
|
||
Balance at beginning of period |
|
|
4.0 |
|
|
|
— |
|
|
Adoption of , net of tax |
|
|
— |
|
|
|
(13.0 |
) |
|
Net change in market risk |
|
|
(2.1 |
) |
|
|
6.9 |
|
|
Balance at end of period |
|
|
1.9 |
|
|
|
(6.1 |
) |
|
Total accumulated other comprehensive loss |
|
|
(607.7 |
) |
|
|
(262.7 |
) |
|
Retained Earnings |
|
|
|
|
|
|
|
||
Balance at beginning of period |
|
|
2,992.9 |
|
|
|
2,983.2 |
|
|
Adoption of , net of tax |
|
|
— |
|
|
|
4.1 |
|
|
Adjusted balance at beginning of period |
|
|
2,992.9 |
|
|
|
2,987.3 |
|
|
Net income (loss) |
|
|
(12.0 |
) |
|
|
104.9 |
|
|
Dividends to shareholders |
|
|
(29.3 |
) |
|
|
(27.0 |
) |
|
Balance at end of period |
|
|
2,951.6 |
|
|
|
3,065.2 |
|
|
Treasury Stock |
|
|
|
|
|
|
|
||
Balance at beginning of period |
|
|
(1,871.4 |
) |
|
|
(1,848.3 |
) |
|
Shares purchased at cost |
|
|
— |
|
|
|
(16.3 |
) |
|
Net shares reissued at cost under employee stock-based |
|
|
2.3 |
|
|
|
4.6 |
|
|
Balance at end of period |
|
|
(1,869.1 |
) |
|
|
(1,860.0 |
) |
|
Total shareholders’ equity |
|
$ |
2,389.0 |
|
|
$ |
2,830.9 |
|
|
The accompanying notes are an integral part of these interim consolidated financial statements.
5
THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
Three Months Ended |
|
|||||
|
|
March 31, |
|
|||||
(In millions) |
|
2023 |
|
|
2022 |
|
||
Cash Flows From Operating Activities |
|
|
|
|
|
|
||
Net income (loss) |
|
$ |
(12.0 |
) |
|
$ |
104.9 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
||
Net realized and unrealized investment losses |
|
|
22.8 |
|
|
|
16.0 |
|
Net amortization and depreciation |
|
|
2.2 |
|
|
|
3.3 |
|
Stock-based compensation expense |
|
|
7.1 |
|
|
|
6.7 |
|
Amortization of defined benefit plan costs |
|
|
2.0 |
|
|
|
1.4 |
|
Deferred income tax benefit |
|
|
(7.7 |
) |
|
|
(5.5 |
) |
Change in deferred acquisition costs |
|
|
7.0 |
|
|
|
(0.9 |
) |
Change in premiums receivable, net of reinsurance premiums payable |
|
|
6.8 |
|
|
|
1.3 |
|
Change in loss, loss adjustment expense and unearned premium reserves |
|
|
145.6 |
|
|
|
90.1 |
|
Change in reinsurance recoverable |
|
|
(8.2 |
) |
|
|
(33.0 |
) |
Change in expenses and taxes payable |
|
|
(114.0 |
) |
|
|
(103.4 |
) |
Cash received for MCCA refund, partially offset by payments made to policyholders |
|
|
— |
|
|
|
148.9 |
|
Other, net |
|
|
(33.5 |
) |
|
|
(29.7 |
) |
Net cash provided by operating activities |
|
|
18.1 |
|
|
|
200.1 |
|
Cash Flows From Investing Activities |
|
|
|
|
|
|
||
Proceeds from disposals and maturities of fixed maturities |
|
|
171.7 |
|
|
|
228.9 |
|
Proceeds from disposals of equity securities and other investments |
|
|
7.8 |
|
|
|
75.2 |
|
Purchase of fixed maturities |
|
|
(259.2 |
) |
|
|
(372.8 |
) |
Purchase of equity securities and other investments |
|
|
(23.3 |
) |
|
|
(38.6 |
) |
Capital expenditures |
|
|
(3.5 |
) |
|
|
(4.9 |
) |
Net cash used in investing activities |
|
|
(106.5 |
) |
|
|
(112.2 |
) |
Cash Flows From Financing Activities |
|
|
|
|
|
|
||
Proceeds from exercise of employee stock options |
|
|
3.0 |
|
|
|
7.4 |
|
Dividends paid to shareholders |
|
|
(28.9 |
) |
|
|
(26.7 |
) |
Repurchases of common stock |
|
|
— |
|
|
|
(16.3 |
) |
Other financing activities |
|
|
(9.2 |
) |
|
|
(11.2 |
) |
Net cash used in financing activities |
|
|
(35.1 |
) |
|
|
(46.8 |
) |
Net change in cash and cash equivalents |
|
|
(123.5 |
) |
|
|
41.1 |
|
Cash and cash equivalents, beginning of period |
|
|
305.0 |
|
|
|
230.9 |
|
Cash and cash equivalents, end of period |
|
$ |
181.5 |
|
|
$ |
272.0 |
|
The accompanying notes are an integral part of these interim consolidated financial statements.
6
THE HANOVER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements of The Hanover Insurance Group, Inc. and its subsidiaries (“THG” or the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the requirements of Form 10-Q. Certain financial information that is provided in annual financial statements, but is not required in interim reports, has been omitted.
The interim consolidated financial statements of THG include the accounts of The Hanover Insurance Company (“Hanover Insurance”) and Citizens Insurance Company of America (“Citizens”), THG’s principal property and casualty companies; and other insurance and non-insurance subsidiaries. These legal entities conduct their operations through several business segments discussed in Note 8 – “Segment Information.” The interim consolidated financial statements also include the Company’s discontinued operations, consisting primarily of the Company’s former accident and health insurance business. All intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
In the opinion of the Company’s management, the accompanying interim consolidated financial statements reflect all adjustments, consisting of normal recurring items, necessary for a fair presentation of the financial position and results of operations. The results of operations for the three months ended March 31, 2023, are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 23, 2023.
2. New Accounting Pronouncements
Recently Implemented Standards
In August 2018, the Financial Accounting Standards Board ("FASB") issued (“ASU 2018-12”), Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. For the Company's discounted accident and health reserves, ASU 2018-12 requires that the discount rate assumption be updated each quarter and be based on an upper-medium grade (low-credit-risk) fixed-income investment yield with a similar duration to the reserves. Previously, any changes in the reserve discount rate assumption was reflected in earnings and these changes will now be recognized in other comprehensive income (loss). This Update is effective for both interim and annual reporting periods beginning after December 15, 2022, and is applicable to the long-term care portion of the Company’s discontinued accident and health insurance reserves. The Company implemented this guidance effective January 1, 2023, on a modified retrospective basis, and it did not have a material impact on its financial position or results of operations.
3. Investments
A. Fixed maturities
The amortized cost and fair value of available-for-sale fixed maturities were as follows:
|
|
March 31, 2023 |
|
|||||||||||||||||||||
|
|
|
|
|
|
|
|
Amortized Cost, |
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
Allowance |
|
|
Net of Allowance |
|
|
Gross |
|
|
Gross |
|
|
|
|
||||||
|
|
Amortized |
|
|
for Credit |
|
|
for Credit |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
||||||
(in millions) |
|
Cost |
|
|
Losses |
|
|
Losses |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
||||||
U.S. Treasury and government agencies |
|
$ |
484.0 |
|
|
$ |
— |
|
|
$ |
484.0 |
|
|
$ |
0.8 |
|
|
$ |
51.9 |
|
|
$ |
432.9 |
|
Foreign government |
|
|
2.2 |
|
|
|
— |
|
|
|
2.2 |
|
|
|
— |
|
|
|
— |
|
|
|
2.2 |
|
Municipal |
|
|
1,258.0 |
|
|
|
— |
|
|
|
1,258.0 |
|
|
|
2.2 |
|
|
|
134.4 |
|
|
|
1,125.8 |
|
Corporate |
|
|
4,063.3 |
|
|
|
(2.4 |
) |
|
|
4,060.9 |
|
|
|
7.7 |
|
|
|
288.7 |
|
|
|
3,779.9 |
|
Residential mortgage-backed |
|
|
1,278.0 |
|
|
|
— |
|
|
|
1,278.0 |
|
|
|
1.3 |
|
|
|
126.2 |
|
|
|
1,153.1 |
|
Commercial mortgage-backed |
|
|
925.9 |
|
|
|
— |
|
|
|
925.9 |
|
|
|
— |
|
|
|
83.4 |
|
|
|
842.5 |
|
Other asset-backed |
|
|
364.2 |
|
|
|
— |
|
|
|
364.2 |
|
|
|
0.1 |
|
|
|
22.5 |
|
|
|
341.8 |
|
Total fixed maturities |
|
$ |
8,375.6 |
|
|
$ |
(2.4 |
) |
|
$ |
8,373.2 |
|
|
$ |
12.1 |
|
|
$ |
707.1 |
|
|
$ |
7,678.2 |
|
7
|
|
December 31, 2022 |
|
|||||||||||||||||||||
|
|
|
|
|
|
|
|
Amortized Cost, |
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
Allowance |
|
|
Net of Allowance |
|
|
Gross |
|
|
Gross |
|
|
|
|
||||||
|
|
Amortized |
|
|
for Credit |
|
|
for Credit |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
||||||
(in millions) |
|
Cost |
|
|
Losses |
|
|
Losses |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
||||||
U.S. Treasury and government agencies |
|
$ |
478.9 |
|
|
$ |
— |
|
|
$ |
478.9 |
|
|
$ |
0.2 |
|
|
$ |
58.9 |
|
|
$ |
420.2 |
|
Foreign government |
|
|
2.3 |
|
|
|
— |
|
|
|
2.3 |
|
|
|
— |
|
|
|
0.1 |
|
|
|
2.2 |
|
Municipal |
|
|
1,239.5 |
|
|
|
— |
|
|
|
1,239.5 |
|
|
|
0.8 |
|
|
|
164.2 |
|
|
|
1,076.1 |
|
Corporate |
|
|
4,066.4 |
|
|
|
(2.1 |
) |
|
|
4,064.3 |
|
|
|
3.3 |
|
|
|
337.7 |
|
|
|
3,729.9 |
|
Residential mortgage-backed |
|
|
1,215.3 |
|
|
|
— |
|
|
|
1,215.3 |
|
|
|
0.6 |
|
|
|
142.1 |
|
|
|
1,073.8 |
|
Commercial mortgage-backed |
|
|
924.1 |
|
|
|
— |
|
|
|
924.1 |
|
|
|
— |
|
|
|
87.7 |
|
|
|
836.4 |
|
Other asset-backed |
|
|
370.1 |
|
|
|
— |
|
|
|
370.1 |
|
|
|
0.1 |
|
|
|
27.0 |
|
|
|
343.2 |
|
Total fixed maturities |
|
$ |
8,296.6 |
|
|
$ |
(2.1 |
) |
|
$ |
8,294.5 |
|
|
$ |
5.0 |
|
|
$ |
817.7 |
|
|
$ |
7,481.8 |
|
The Company deposits funds with various state and governmental authorities. For a discussion of the Company’s deposits with state and governmental authorities, see also Note 2 – “Investments” in the Notes to Consolidated Financial Statements in the Company’s 2022 Annual Report on Form 10-K.
The amortized cost and fair value by maturity periods for fixed maturities are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties, or the Company may have the right to put or sell the obligations back to the issuers.
|
|
March 31, 2023 |
|
|||||
|
|
Amortized Cost, Net |
|
|
|
|
||
|
|
of Allowance for |
|
|
Fair |
|
||
(in millions) |
|
Credit Losses |
|
|
Value |
|
||
Due in one year or less |
|
$ |
340.3 |
|
|
$ |
336.6 |
|
Due after one year through five years |
|
|
2,536.5 |
|
|
|
2,439.5 |
|
Due after five years through ten years |
|
|
2,539.5 |
|
|
|
2,231.8 |
|
Due after ten years |
|
|
388.8 |
|
|
|
332.9 |
|
|
|
|
5,805.1 |
|
|
|
5,340.8 |
|
Mortgage-backed and other asset-backed securities |
|
|
2,568.1 |
|
|
|
2,337.4 |
|
Total fixed maturities |
|
$ |
8,373.2 |
|
|
$ |
7,678.2 |
|
B. Fixed maturity securities in an unrealized loss position
The following tables provide information about the Company’s available-for-sale fixed maturity securities that were in an unrealized loss position at March 31, 2023 and December 31, 2022, including the length of time the securities have been in an unrealized loss position:
|
|
March 31, 2023 |
|
|||||||||||||||||||||
|
|
12 months or less |
|
|
Greater than 12 months |
|
|
Total |
|
|||||||||||||||
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
||||||
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
||||||
(in millions) |
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
||||||
Investment grade: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. Treasury and government agencies |
|
$ |
3.8 |
|
|
$ |
113.5 |
|
|
$ |
48.1 |
|
|
$ |
261.5 |
|
|
$ |
51.9 |
|
|
$ |
375.0 |
|
Foreign governments |
|
|
— |
|
|
|
2.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2.0 |
|
Municipal |
|
|
12.8 |
|
|
|
288.3 |
|
|
|
121.6 |
|
|
|
718.1 |
|
|
|
134.4 |
|
|
|
1,006.4 |
|
Corporate |
|
|
44.3 |
|
|
|
1,480.5 |
|
|
|
230.9 |
|
|
|
1,710.4 |
|
|
|
275.2 |
|
|
|
3,190.9 |
|
Residential mortgage-backed |
|
|
13.8 |
|
|
|
393.0 |
|
|
|
112.4 |
|
|
|
640.0 |
|
|
|
126.2 |
|
|
|
1,033.0 |
|
Commercial mortgage-backed |
|
|
12.0 |
|
|
|
284.5 |
|
|
|
71.4 |
|
|
|
557.9 |
|
|
|
83.4 |
|
|
|
842.4 |
|
Other asset-backed |
|
|
4.4 |
|
|
|
206.5 |
|
|
|
18.1 |
|
|
|
118.9 |
|
|
|
22.5 |
|
|
|
325.4 |
|
Total investment grade |
|
|
91.1 |
|
|
|
2,768.3 |
|
|
|
602.5 |
|
|
|
4,006.8 |
|
|
|
693.6 |
|
|
|
6,775.1 |
|
Below investment grade: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Corporate |
|
|
4.3 |
|
|
|
120.3 |
|
|
|
9.2 |
|
|
|
68.5 |
|
|
|
13.5 |
|
|
|
188.8 |
|
Total fixed maturities |
|
$ |
95.4 |
|
|
$ |
2,888.6 |
|
|
$ |
611.7 |
|
|
$ |
4,075.3 |
|
|
$ |
707.1 |
|
|
$ |
6,963.9 |
|
8
|
|
December 31, 2022 |
|
|||||||||||||||||||||
|
|
12 months or less |
|
|
Greater than 12 months |
|
|
Total |
|
|||||||||||||||
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
||||||
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
||||||
(in millions) |
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
||||||
Investment grade: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. Treasury and government agencies |
|
$ |
15.8 |
|
|
$ |
237.3 |
|
|
$ |
43.1 |
|
|
$ |
160.7 |
|
|
$ |
58.9 |
|
|
$ |
398.0 |
|
Foreign governments |
|
|
0.1 |
|
|
|
1.9 |
|
|
|
— |
|
|
|
— |
|
|
|
0.1 |
|
|
|
1.9 |
|
Municipal |
|
|
64.9 |
|
|
|
595.5 |
|
|
|
99.3 |
|
|
|
386.6 |
|
|
|
164.2 |
|
|
|
982.1 |
|
Corporate |
|
|
202.2 |
|
|
|
2,786.2 |
|
|
|
118.2 |
|
|
|
489.8 |
|
|
|
320.4 |
|
|
|
3,276.0 |
|
Residential mortgage-backed |
|
|
51.6 |
|
|
|
642.0 |
|
|
|
90.5 |
|
|
|
387.6 |
|
|
|
142.1 |
|
|
|
1,029.6 |
|
Commercial mortgage-backed |
|
|
48.7 |
|
|
|
663.2 |
|
|
|
39.0 |
|
|
|
164.4 |
|
|
|
87.7 |
|
|
|
827.6 |
|
Other asset-backed |
|
|
11.0 |
|
|
|
234.8 |
|
|
|
16.0 |
|
|
|
75.1 |
|
|
|
27.0 |
|
|
|
309.9 |
|
Total investment grade |
|
|
394.3 |
|
|
|
5,160.9 |
|
|
|
406.1 |
|
|
|
1,664.2 |
|
|
|
800.4 |
|
|
|
6,825.1 |
|
Below investment grade: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Corporate |
|
|
13.5 |
|
|
|
253.2 |
|
|
|
3.8 |
|
|
|
17.3 |
|
|
|
17.3 |
|
|
|
270.5 |
|
Total fixed maturities |
|
$ |
407.8 |
|
|
$ |
5,414.1 |
|
|
$ |
409.9 |
|
|
$ |
1,681.5 |
|
|
$ |
817.7 |
|
|
$ |
7,095.6 |
|
The Company views gross unrealized losses on fixed maturities as non-credit related and through its assessment of unrealized losses has determined that these securities will recover, allowing the Company to realize the anticipated long-term economic value. The Company currently does not intend to sell, nor does it expect to be required to sell these securities before recovery of their amortized cost. The Company employs a systematic methodology to evaluate declines in fair value below amortized cost for fixed maturity securities. In determining impairments, the Company evaluates several factors and circumstances, including the issuer’s overall financial condition; the issuer’s credit and financial strength ratings; the issuer’s financial performance, including earnings trends and asset quality; any specific events which may influence the operations of the issuer; the general outlook for market conditions in the industry or geographic region in which the issuer operates; and the degree to which the fair value of an issuer’s securities is below the Company’s amortized cost. The Company also considers any factors that might raise doubt about the issuer’s ability to make contractual payments as they come due and whether the Company expects to recover the entire amortized cost basis of the security.
C. Proceeds from sales
The proceeds from sales of available-for-sale fixed maturities and gross realized gains and gross realized losses on those sales were as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
(in millions) |
|
|
|
|
|
|
||
Proceeds from sales |
|
$ |
27.6 |
|
|
$ |
68.6 |
|
Gross gains |
|
|
0.1 |
|
|
|
1.6 |
|
Gross losses |
|
|
1.4 |
|
|
|
0.5 |
|
D. Impairments
For the three months ended March 31, 2023, the Company recognized net impairments of $14.8 million, primarily consisting of $10.3 million of intent to sell fixed maturity securities and $4.1 million of estimated credit losses on mortgage loans. For the three months ended March 31, 2022, the Company recognized $0.9 million on impairments of fixed maturity securities.
At March 31, 2023 and December 31, 2022, the allowance for credit losses on mortgage loans was $7.2 million and $3.2 million respectively, and the allowance for credit losses on available-for-sale debt securities was $2.4 million and $2.1 million, respectively. The following table provides a rollforward of the allowance for credit losses on mortgage loans:
|
Three Months Ended March 31, |
|
|||||
(in millions) |
2023 |
|
|
2022 |
|
||
Allowance for credit losses as of the beginning of the period |
$ |
3.2 |
|
|
$ |
7.1 |
|
Additional credit losses on investments for which an allowance |
|
4.1 |
|
|
|
— |
|
Recoveries |
|
(0.1 |
) |
|
|
— |
|
Allowance for credit losses as of the end of the period |
$ |
7.2 |
|
|
$ |
7.1 |
|
9
The methodology and significant inputs used to measure the amount of credit losses were as follows:
Fixed maturities, Corporate bonds – the Company utilized a financial model that derives expected cash flows based on probability-of-default factors by credit rating and asset duration, and loss-given-default factors based on security type. These factors are based on historical data provided by an independent third-party rating agency. In addition, other qualitative market data relevant to the realizability of contractual cash flows may be considered, including current conditions and reasonable and supportable forecasts.
Mortgage loans – the Company estimated losses by applying expected loss rates, which are based on historical data. Embedded in expected loss rates are mortgage risk ratings and risk factors associated with property type such as office, retail, lodging, multi-family and industrial. Risk ratings, based on property characteristics and metrics including the geographic market, are predominantly driven by estimates of loan-to-value and debt service coverage ratios. Ratings may be adjusted to reflect current conditions and to incorporate reasonable and supportable forecasts, such as volatility of cash flows and valuation.
E. Equity securities
The following table provides pre-tax net realized and unrealized gains (losses) on equity securities:
|
Three Months Ended March 31, |
|
|||||
(in millions) |
2023 |
|
|
2022 |
|
||
Net losses recognized during the period |
$ |
(7.1 |
) |
|
$ |
(18.0 |
) |
Less: net gains recognized on equity securities sold during |
|
— |
|
|
|
0.5 |
|
Net unrealized losses recognized during the period on equity |
$ |
(7.1 |
) |
|
$ |
(18.5 |
) |
4. Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, i.e., exit price, in an orderly transaction between market participants. The Company emphasizes the use of observable market data whenever available in determining fair value. Fair values presented for certain financial instruments are estimates which, in many cases, may differ significantly from the amounts that could be realized upon immediate liquidation. A hierarchy of the three broad levels of fair value is as follows, with the highest priority given to Level 1 as these are the most observable, and the lowest priority given to Level 3:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data, including model-derived valuations.
Level 3 – Unobservable inputs that are supported by little or no market activity.
When more than one level of input is used to determine fair value, the financial instrument is classified as Level 2 or Level 3 according to the lowest level input that has a significant impact on the fair value measurement.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments and have not changed since last year.
Fixed Maturities
Level 1 securities generally include U.S. Treasury issues and other securities that are highly liquid, and for which quoted market prices are available. Level 2 securities are valued using pricing for similar securities and pricing models that incorporate observable inputs including, but not limited to, yield curves and issuer spreads. Level 3 securities include issues for which little observable data can be obtained, primarily due to the illiquid nature of the securities, and for which significant inputs used to determine fair value are based on the Company’s own assumptions.
The Company utilizes third-party pricing services for the valuation of the majority of its fixed maturity securities and receives one quote per security. When quoted market prices in an active market are available, they are provided by the pricing service as the fair value and such values are classified as Level 1. Since fixed maturities other than U.S. Treasury securities generally do not trade on a daily basis, the pricing services prepare estimates of fair value for those securities using pricing techniques based on a market approach. Inputs into the fair value pricing common to all asset classes include: benchmark U.S. Treasury security yield curves; reported trades of identical or similar fixed maturity securities; broker/dealer quotes of identical or similar fixed maturity securities and structural characteristics such as maturity date, coupon, mandatory principal payment dates, frequency of interest and principal payments, and optional redemption features. Inputs into the fair value applications that are unique by asset class include, but are not limited to:
10
Generally, all prices provided by the pricing services, except actively traded securities with quoted market prices, are reported as Level 2.
The Company holds privately placed fixed maturity securities and certain other fixed maturity securities that do not have an active market and for which the pricing services cannot provide fair values. The Company determines fair values for these securities using either matrix pricing, which utilizes the market approach, or broker quotes. The Company will use observable market data as inputs into the fair value techniques, as discussed in the determination of Level 2 fair values, to the extent it is available, but is also required to use a certain amount of unobservable judgment due to the illiquid nature of the securities involved. Unobservable judgment reflected in the Company’s matrix model accounts for estimates of additional spread required by market participants for factors such as issue size, credit stress, structural complexity, high bond coupon, or other unique features. These matrix-priced securities are reported as Level 2 or Level 3, depending on the significance of the impact of unobservable judgment on the security’s value. Additionally, the Company may obtain non-binding broker quotes, which are reported as Level 3.
Equity Securities
Level 1 consists of publicly traded securities, including exchange-traded funds, valued at quoted market prices. Level 2 includes securities that are valued using pricing for similar securities and pricing models that incorporate observable inputs. Level 3 consists of common or preferred stock of private companies for which observable inputs are not available.
The Company utilizes a third-party pricing service for the valuation of the majority of its equity securities and receives one quote for each equity security. When quoted market prices in an active market are available, they are provided by the pricing service as the fair value and such values are classified as Level 1. The Company holds certain equity securities that have been issued by privately-held entities that do not have an active market and for which the pricing service cannot provide fair values. The Company estimates fair value for these securities based on prices from recent financing rounds, which may be adjusted for liquidity and other factors, or based on the issuer’s book value and market multiples, and reports them as Level 3. Additionally, the Company may obtain non-binding broker quotes, which are reported as Level 3.
Other Investments
Other investments primarily include mortgage participations and limited partnerships not subject to the equity method of accounting. The fair values of limited partnerships not subject to the equity method of accounting are based on the net asset value ("NAV") provided by the general partner, adjusted for recent financial information, and are excluded from the fair value hierarchy.
11
The estimated fair values of the financial instruments were as follows:
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
||||||||||
|
|
Carrying |
|
|
Market |
|
|
Carrying |
|
|
Market |
|
||||
(in millions) |
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
||||
Financial Assets carried at: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Fair Value through AOCI: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Fixed maturities |
|
$ |
7,678.2 |
|
|
$ |
7,678.2 |
|
|
$ |
7,481.8 |
|
|
$ |
7,481.8 |
|
Fair Value through Net Income: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equity securities |
|
|
234.8 |
|
|
|
234.8 |
|
|
|
241.9 |
|
|
|
241.9 |
|
Other investments |
|
|
129.2 |
|
|
|
129.2 |
|
|
|
131.8 |
|
|
|
131.8 |
|
Amortized Cost/Cost: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other investments |
|
|
427.8 |
|
|
|
404.7 |
|
|
|
432.3 |
|
|
|
401.0 |
|
Cash and cash equivalents |
|
|
181.5 |
|
|
|
181.5 |
|
|
|
305.0 |
|
|
|
305.0 |
|
Total financial instruments |
|
$ |
8,651.5 |
|
|
$ |
8,628.4 |
|
|
$ |
8,592.8 |
|
|
$ |
8,561.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Financial Liabilities carried at: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortized Cost: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Debt |
|
$ |
782.6 |
|
|
$ |
724.5 |
|
|
$ |
782.4 |
|
|
$ |
713.9 |
|
The Company has processes designed to ensure that the values received from its third-party pricing services are accurately recorded, that the data inputs and valuation approaches and techniques utilized are appropriate and consistently applied, and that the assumptions are reasonable and consistent with the objective of determining fair value. The Company reviews the pricing services’ policies describing its methodology, processes, practices and inputs, including various financial models used to value securities. For assets carried at fair value, the Company performs a review of the fair value hierarchy classifications and of prices received from its pricing services on a quarterly basis. Also, the Company reviews the portfolio pricing, including a process for which securities with changes in prices that exceed a defined threshold are verified to independent sources, if available. If upon review, the Company is not satisfied with the validity of a given price, a pricing challenge would be submitted to the applicable pricing service along with supporting documentation for its review. The Company does not adjust quotes or prices obtained from the pricing services unless the pricing service agrees with the Company’s challenge. During the first three months of 2023 and 2022, the Company did not adjust any prices received from its pricing services.
Changes in the observability of valuation inputs may result in a reclassification of certain financial assets or liabilities within the fair value hierarchy. As previously discussed, the Company utilizes third-party pricing services for the valuation of the majority of its fixed maturities and equity securities. The pricing services have indicated that they will only produce an estimate of fair value if there is objectively verifiable information to produce a valuation. If a pricing service discontinues pricing an investment, the Company will use observable market data to the extent it is available, but may also be required to make assumptions for market-based inputs that are unavailable due to market conditions.
The following tables provide, for each hierarchy level, the Company’s investment assets that were measured at fair value on a recurring basis.
|
|
March 31, 2023 |
|
|||||||||||||
(in millions) |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. Treasury and government agencies |
|
$ |
432.9 |
|
|
$ |
295.8 |
|
|
$ |
137.1 |
|
|
$ |
— |
|
Foreign government |
|
|
2.2 |
|
|
|
— |
|
|
|
2.2 |
|
|
|
— |
|
Municipal |
|
|
1,125.8 |
|
|
|
— |
|
|
|
1,116.7 |
|
|
|
9.1 |
|
Corporate |
|
|
3,779.9 |
|
|
|
— |
|
|
|
3,779.8 |
|
|
|
0.1 |
|
Residential mortgage-backed, U.S. agency backed |
|
|
1,022.1 |
|
|
|
— |
|
|
|
1,022.1 |
|
|
|
— |
|
Residential mortgage-backed, non-agency |
|
|
131.0 |
|
|
|
— |
|
|
|
131.0 |
|
|
|
— |
|
Commercial mortgage-backed |
|
|
842.5 |
|
|
|
— |
|
|
|
835.0 |
|
|
|
7.5 |
|
Other asset-backed |
|
|
341.8 |
|
|
|
— |
|
|
|
341.8 |
|
|
|
— |
|
Total fixed maturities |
|
|
7,678.2 |
|
|
|
295.8 |
|
|
|
7,365.7 |
|
|
|
16.7 |
|
Equity securities |
|
|
234.8 |
|
|
|
227.3 |
|
|
|
— |
|
|
|
7.5 |
|
Other investments |
|
|
3.6 |
|
|
|
— |
|
|
|
— |
|
|
|
3.6 |
|
Total investment assets at fair value |
|
$ |
7,916.6 |
|
|
$ |
523.1 |
|
|
$ |
7,365.7 |
|
|
$ |
27.8 |
|
12
|
|
December 31, 2022 |
|
|||||||||||||
(in millions) |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. Treasury and government agencies |
|
$ |
420.2 |
|
|
$ |
282.7 |
|
|
$ |
137.5 |
|
|
$ |
— |
|
Foreign government |
|
|
2.2 |
|
|
|
— |
|
|
|
2.2 |
|
|
|
— |
|
Municipal |
|
|
1,076.1 |
|
|
|
— |
|
|
|
1,066.8 |
|
|
|
9.3 |
|
Corporate |
|
|
3,729.9 |
|
|
|
— |
|
|
|
3,729.8 |
|
|
|
0.1 |
|
Residential mortgage-backed, U.S. agency backed |
|
|
974.0 |
|
|
|
— |
|
|
|
974.0 |
|
|
|
— |
|
Residential mortgage-backed, non-agency |
|
|
99.8 |
|
|
|
— |
|
|
|
99.8 |
|
|
|
— |
|
Commercial mortgage-backed |
|
|
836.4 |
|
|
|
— |
|
|
|
828.9 |
|
|
|
7.5 |
|
Other asset-backed |
|
|
343.2 |
|
|
|
— |
|
|
|
343.2 |
|
|
|
— |
|
Total fixed maturities |
|
|
7,481.8 |
|
|
|
282.7 |
|
|
|
7,182.2 |
|
|
|
16.9 |
|
Equity securities |
|
|
241.9 |
|
|
|
234.4 |
|
|
|
— |
|
|
|
7.5 |
|
Other investments |
|
|
3.6 |
|
|
|
— |
|
|
|
— |
|
|
|
3.6 |
|
Total investment assets at fair value |
|
$ |
7,727.3 |
|
|
$ |
517.1 |
|
|
$ |
7,182.2 |
|
|
$ |
28.0 |
|
Limited partnerships measured at fair value using the NAV based on an ownership interest in partners’ capital have not been included in the hierarchy tables. At March 31, 2023 and December 31, 2022, the fair values of these investments were $125.6 million and $128.2 million, respectively, less than 2% of total investment assets.
The following tables provide, for each hierarchy level, the Company’s estimated fair values of financial instruments that were not carried at fair value:
|
|
March 31, 2023 |
|
|||||||||||||
(in millions) |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents |
|
$ |
181.5 |
|
|
$ |
181.5 |
|
|
$ |
— |
|
|
$ |
— |
|
Other investments |
|
|
404.7 |
|
|
|
— |
|
|
|
6.0 |
|
|
|
398.7 |
|
Total financial instruments |
|
$ |
586.2 |
|
|
$ |
181.5 |
|
|
$ |
6.0 |
|
|
$ |
398.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Debt |
|
$ |
724.5 |
|
|
$ |
— |
|
|
$ |
724.5 |
|
|
$ |
— |
|
|
|
December 31, 2022 |
|
|||||||||||||
(in millions) |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents |
|
$ |
305.0 |
|
|
$ |
305.0 |
|
|
$ |
— |
|
|
$ |
— |
|
Other investments |
|
|
401.0 |
|
|
|
— |
|
|
|
6.0 |
|
|
|
395.0 |
|
Total financial instruments |
|
$ |
706.0 |
|
|
$ |
305.0 |
|
|
$ |
6.0 |
|
|
$ |
395.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Debt |
|
$ |
713.9 |
|
|
$ |
— |
|
|
$ |
713.9 |
|
|
$ |
— |
|
13
The following tables provide a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
|
|
Fixed Maturities |
|
|
|
|
|
|
|
|||||||||||||||
(in millions) |
|
Municipal |
|
|
Corporate |
|
|
Commercial |
|
|
Total |
|
|
Equity and |
|
|
Total |
|
||||||
Three Months Ended March 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Balance January 1, 2023 |
|
$ |
9.3 |
|
|
$ |
0.1 |
|
|
$ |
7.5 |
|
|
$ |
16.9 |
|
|
$ |
11.1 |
|
|
$ |
28.0 |
|
Total gains included in other comprehensive |
|
|
0.1 |
|
|
|
— |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
— |
|
|
|
0.3 |
|
Settlements |
|
|
(0.3 |
) |
|
|
— |
|
|
|
(0.2 |
) |
|
|
(0.5 |
) |
|
|
— |
|
|
|
(0.5 |
) |
Balance March 31, 2023 |
|
$ |
9.1 |
|
|
$ |
0.1 |
|
|
$ |
7.5 |
|
|
$ |
16.7 |
|
|
$ |
11.1 |
|
|
$ |
27.8 |
|
|
$ |
0.1 |
|
|
$ |
— |
|
|
$ |
0.2 |
|
|
$ |
0.3 |
|
|
$ |
— |
|
|
$ |
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Three Months Ended March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Balance January 1, 2022 |
|
$ |
14.0 |
|
|
$ |
0.1 |
|
|
$ |
11.3 |
|
|
$ |
25.4 |
|
|
$ |
14.4 |
|
|
$ |
39.8 |
|
Total losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5.3 |
) |
|
|
(5.3 |
) |
|
|
|
(0.6 |
) |
|
|
— |
|
|
|
(0.5 |
) |
|
|
(1.1 |
) |
|
|
— |
|
|
|
(1.1 |
) |
|
Settlements |
|
|
(1.1 |
) |
|
|
— |
|
|
|
(0.2 |
) |
|
|
(1.3 |
) |
|
|
— |
|
|
|
(1.3 |
) |
Balance March 31, 2022 |
|
$ |
12.3 |
|
|
$ |
0.1 |
|
|
$ |
10.6 |
|
|
$ |
23.0 |
|
|
$ |
9.1 |
|
|
$ |
32.1 |
|
|
$ |
(0.6 |
) |
|
$ |
— |
|
|
$ |
(0.5 |
) |
|
$ |
(1.1 |
) |
|
$ |
— |
|
|
$ |
(1.1 |
) |
There were no transfers between Level 2 and Level 3, and there were no Level 3 liabilities held by the Company for the three months ended March 31, 2023 and 2022.
The following table provides quantitative information about the significant unobservable inputs used by the Company in the fair value measurements of Level 3 assets. Where discounted cash flows were used in the valuation of fixed maturities, the internally-developed discount rate was adjusted by the significant unobservable inputs shown in the table.
|
|
|
|
|
|
|
March 31, 2023 |
|
December 31, 2022 |
||||||||
|
|
Valuation |
|
Significant |
|
|
Fair |
|
|
Range |
|
Fair |
|
|
Range |
||
(in millions) |
|
Technique |
|
Unobservable Inputs |
|
|
Value |
|
|
(Wtd Average) |
|
Value |
|
|
(Wtd Average) |
||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Municipal |
|
Discounted |
|
Discount for: |
|
|
$ |
9.1 |
|
|
4.5 - 6.8% (6.6%) |
|
$ |
9.3 |
|
|
4.5 - 6.8% (6.6%) |
Corporate |
|
Discounted |
|
Discount for: |
|
|
0.1 |
|
|
2.5% (2.5%) |
|
|
0.1 |
|
|
2.5% (2.5%) |
|
Commercial |
|
Discounted |
|
Discount for: |
|
|
7.5 |
|
|
3.0 - 3.1% (3.0%) |
|
|
7.5 |
|
|
3.0 - 3.1% (3.0%) |
|
Equity securities |
|
Market |
|
Net tangible asset |
|
|
1.1 |
|
|
N/A |
|
|
1.1 |
|
|
N/A |
|
|
|
Internal price based on financing round |
|
Discount for: |
|
|
6.4 |
|
|
27.0% (27.0%) |
|
|
6.4 |
|
|
27.0% (27.0%) |
|
Other |
|
|
|
|
3.6 |
|
|
17.2% (17.2%) |
|
3.6 |
|
|
17.2% (17.2%) |
The weighted average of the unobservable inputs was weighted by the relative fair value of the securities to which the inputs were applied. Each unobservable input is based on the Company’s subjective opinion and therefore inherently contains a degree of uncertainty. Significant changes in any of the above inputs in isolation would result in a significantly lower or higher fair value measurement. There were no interrelationships between these inputs that might magnify or mitigate the effect of changes in unobservable inputs on the fair value measurement.
14
5. Income Taxes
Income tax expense (benefit) for the three months ended March 31, 2023 and 2022 has been computed using estimated annual effective tax rates. These rates are revised, if necessary, at the end of each successive interim period to reflect current estimates of the annual effective tax rates.
The tax provision was comprised of a U.S. federal income tax benefit of $5.5 million and an expense of $24.7 million for the three months ended March 31, 2023 and 2022, respectively.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions, and have previously filed in foreign jurisdictions. The Company and its subsidiaries are subject to U.S. federal and state income tax examinations and foreign examinations for years after 2018. The audit of the Company’s Illinois business income tax year 2019 commenced in May 2022.
6. Pension Plans
The components of net periodic pension cost for the included in the Company’s results of operations are as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
(in millions) |
|
Pension Plans |
|
|||||
Interest cost |
|
$ |
5.5 |
|
|
$ |
3.8 |
|
Expected return on plan assets |
|
|
(5.5 |
) |
|
|
(4.3 |
) |
Recognized net actuarial loss |
|
|
1.9 |
|
|
|
1.3 |
|
Net periodic pension cost |
|
$ |
1.9 |
|
|
$ |
0.8 |
|
7. Other Comprehensive Income (Loss)
The following tables provide changes in other comprehensive income (loss).
|
|
Three Months Ended March 31, |
|
|||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
||||||||||||||||||
|
|
|
|
|
Tax |
|
|
|
|
|
|
|
|
Tax |
|
|
|
|
||||||
|
|
|
|
|
Benefit |
|
|
Net of |
|
|
|
|
|
Benefit |
|
|
Net of |
|
||||||
(in millions) |
|
Pre-Tax |
|
|
(Expense) |
|
|
Tax |
|
|
Pre-Tax |
|
|
(Expense) |
|
|
Tax |
|
||||||
Changes in net unrealized gains (losses) on investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net unrealized gains (losses) arising during period |
|
$ |
107.7 |
|
|
$ |
(22.6 |
) |
|
$ |
85.1 |
|
|
$ |
(477.5 |
) |
|
$ |
100.3 |
|
|
$ |
(377.2 |
) |
Net unrealized gains (losses) arising during period |
|
|
0.8 |
|
|
|
(0.1 |
) |
|
|
0.7 |
|
|
|
(1.2 |
) |
|
|
0.2 |
|
|
|
(1.0 |
) |
Amount of (gains) losses realized from sales and |
|
|
1.1 |
|
|
|
(1.0 |
) |
|
|
0.1 |
|
|
|
(3.0 |
) |
|
|
0.6 |
|
|
|
(2.4 |
) |
Amount of credit-related impairments recognized |
|
|
0.4 |
|
|
|
(0.1 |
) |
|
|
0.3 |
|
|
|
0.6 |
|
|
|
(0.1 |
) |
|
|
0.5 |
|
Amount of additional impairment losses |
|
|
10.3 |
|
|
|
(2.2 |
) |
|
|
8.1 |
|
|
|
0.3 |
|
|
|
(0.1 |
) |
|
|
0.2 |
|
Net unrealized gains (losses) |
|
|
120.3 |
|
|
|
(26.0 |
) |
|
|
94.3 |
|
|
|
(480.8 |
) |
|
|
100.9 |
|
|
|
(379.9 |
) |
Pension and postretirement benefits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Amortization of net actuarial losses |
|
|
2.0 |
|
|
|
(0.4 |
) |
|
|
1.6 |
|
|
|
1.4 |
|
|
|
(0.3 |
) |
|
|
1.1 |
|
Long-duration insurance contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net change in market risk |
|
|
(2.7 |
) |
|
|
0.6 |
|
|
|
(2.1 |
) |
|
|
8.8 |
|
|
|
(1.9 |
) |
|
|
6.9 |
|
Other comprehensive income (loss) |
|
$ |
119.6 |
|
|
$ |
(25.8 |
) |
|
$ |
93.8 |
|
|
$ |
(470.6 |
) |
|
$ |
98.7 |
|
|
$ |
(371.9 |
) |
15
Reclassifications out of accumulated other comprehensive loss were as follows:
|
|
Three Months Ended |
|
|
|
|||||
|
|
March 31, |
|
|
|
|||||
(in millions) |
|
2023 |
|
|
2022 |
|
|
|
||
|
|
Amount Reclassified from |
|
|
|
|||||
Details about Accumulated Other |
|
Accumulated Other |
|
|
Affected Line Item in the Statement |
|||||
Comprehensive Loss Components |
|
Comprehensive Loss |
|
|
Where Net Income (Loss) is Presented |
|||||
Net unrealized gains (losses) on |
|
$ |
(1.1 |
) |
|
$ |
3.0 |
|
|
Net realized gains (losses) from sales |
|
|
|
(10.7 |
) |
|
|
(0.9 |
) |
|
Impairments on investments |
|
|
|
(11.8 |
) |
|
|
2.1 |
|
|
Total before tax |
|
|
|
3.3 |
|
|
|
(0.4 |
) |
|
Income tax benefit (expense) |
|
|
|
(8.5 |
) |
|
|
1.7 |
|
|
Continuing operations; net of tax |
Amortization of defined benefit pension |
|
|
(2.0 |
) |
|
|
(1.4 |
) |
|
Loss adjustment expenses and other |
|
|
|
0.4 |
|
|
|
0.3 |
|
|
Income tax benefit |
|
|
|
(1.6 |
) |
|
|
(1.1 |
) |
|
Continuing operations; net of tax |
Net change in market risk |
|
|
— |
|
|
|
0.2 |
|
|
Loss from discontinued life businesses |
|
|
|
— |
|
|
|
(0.1 |
) |
|
Income tax benefit (expense) |
|
|
|
— |
|
|
|
0.1 |
|
|
Discontinuing operations; net of tax |
Total reclassifications for the period |
|
$ |
(10.1 |
) |
|
$ |
0.7 |
|
|
Benefit (expense) reflected in income (loss), |
8. Segment Information
The Company’s primary business operations include insurance products and services provided through four operating segments: Core Commercial, Specialty, Personal Lines and Other. Core Commercial includes commercial multiple peril, commercial automobile, workers’ compensation, and other commercial coverages provided to small and mid-sized businesses. Specialty includes four divisions of business: Professional and Executive Lines, Specialty Property and Casualty (“Specialty P&C”), Marine, and Surety and Other. Specialty P&C includes coverages such as program business, which provides commercial insurance to markets with specialized coverage or risk management needs related to groups of similar businesses, specialty industrial and commercial property, excess and surplus lines and specialty general liability coverage. Personal Lines includes personal automobile, homeowners and other personal coverages. Included in the Other segment are Opus Investment Management, Inc., which markets investment management services to institutions, pension funds and other organizations; earnings on holding company assets; holding company and other expenses, including certain costs associated with retirement benefits due to the Company’s former life insurance employees and agents; and run-off voluntary assumed property and casualty pools and run-off direct asbestos and environmental businesses.
The Company reports interest expense related to debt separately from the earnings of its operating segments. This consists primarily of interest on the Company’s senior and subordinated debentures.
Management evaluates the results of its segments based on operating income before income taxes, excluding interest expense on debt. Operating income before income taxes excludes certain items which are included in net income (loss), such as net realized and unrealized investment gains and losses. Such gains and losses are excluded since they are determined by interest rates, financial markets and the timing of sales. Also, operating income before income taxes excludes net gains and losses on disposals of businesses, gains and losses related to the repayment of debt, discontinued operations, costs to acquire businesses, restructuring costs, the cumulative effect of accounting changes and certain other items. Although the items excluded from operating income before interest expense and income taxes may be important components in understanding and assessing the Company’s overall financial performance, management believes that the presentation of operating income before interest expense and income taxes enhances an investor’s understanding of the Company’s results of operations by highlighting net income (loss) attributable to the core operations of the business. However, operating income before income taxes should not be construed as a substitute for income before income taxes or income (loss) from continuing operations, and operating income should not be construed as a substitute for net income (loss).
16
Summarized below is financial information with respect to the Company’s business segments.
|
|
Three Months Ended |
|
|||||
|
|
March 31, |
|
|||||
(in millions) |
|
2023 |
|
|
2022 |
|
||
Operating revenues: |
|
|
|
|
|
|
||
Core Commercial |
|
$ |
544.7 |
|
|
$ |
511.1 |
|
Specialty |
|
|
330.5 |
|
|
|
301.3 |
|
Personal Lines |
|
|
587.8 |
|
|
|
530.7 |
|
Other |
|
|
3.7 |
|
|
|
3.5 |
|
Total |
|
|
1,466.7 |
|
|
|
1,346.6 |
|
Net realized and unrealized investment losses |
|
|
(23.0 |
) |
|
|
(15.9 |
) |
Total revenues |
|
$ |
1,443.7 |
|
|
$ |
1,330.7 |
|
Operating income before interest expense and income taxes: |
|
|
|
|
|
|
||
Core Commercial: |
|
|
|
|
|
|
||
Underwriting income (loss) |
|
$ |
(24.8 |
) |
|
$ |
32.2 |
|
Net investment income |
|
|
36.1 |
|
|
|
35.4 |
|
Other expense |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
Core Commercial operating income |
|
|
11.2 |
|
|
|
67.5 |
|
Specialty: |
|
|
|
|
|
|
||
Underwriting income |
|
|
30.7 |
|
|
|
33.9 |
|
Net investment income |
|
|
17.0 |
|
|
|
16.2 |
|
Other income (expense) |
|
|
0.6 |
|
|
|
(0.1 |
) |
Specialty operating income |
|
|
48.3 |
|
|
|
50.0 |
|
Personal Lines: |
|
|
|
|
|
|
||
Underwriting income (loss) |
|
|
(72.2 |
) |
|
|
12.3 |
|
Net investment income |
|
|
22.6 |
|
|
|
22.6 |
|
Other income |
|
|
3.0 |
|
|
|
1.4 |
|
Personal Lines operating income (loss) |
|
|
(46.6 |
) |
|
|
36.3 |
|
Other: |
|
|
|
|
|
|
||
Underwriting income |
|
|
— |
|
|
|
— |
|
Net investment income |
|
|
3.0 |
|
|
|
2.7 |
|
Other expense |
|
|
(2.7 |
) |
|
|
(2.1 |
) |
Other operating income |
|
|
0.3 |
|
|
|
0.6 |
|
Operating income before interest expense and income taxes |
|
|
13.2 |
|
|
|
154.4 |
|
Interest on debt |
|
|
(8.5 |
) |
|
|
(8.5 |
) |
Operating income before income taxes |
|
|
4.7 |
|
|
|
145.9 |
|
Non-operating items: |
|
|
|
|
|
|
||
Net realized and unrealized investment losses |
|
|
(23.0 |
) |
|
|
(15.9 |
) |
Other non-operating |
|
|
0.8 |
|
|
|
— |
|
Income (loss) from continuing operations before income taxes |
|
$ |
(17.5 |
) |
|
$ |
130.0 |
|
The following table provides identifiable assets for the Company’s segments and discontinued operations:
(in millions) |
|
March 31, 2023 |
|
|
December 31, 2022 |
|
||
Property and Casualty |
|
$ |
14,004.3 |
|
|
$ |
13,911.0 |
|
Assets of discontinued businesses |
|
|
87.4 |
|
|
|
84.1 |
|
Total |
|
$ |
14,091.7 |
|
|
$ |
13,995.1 |
|
The Company reviews the assets of its insurance subsidiaries collectively and does not allocate them among the Core Commercial, Specialty, Personal Lines and Other segments.
17
9. Stock-based Compensation
As of March 31, 2023, there were 2,919,433 and 2,292,464 shares available for grants under The Hanover Insurance Group 2022 Long-Term Incentive Plan and The Hanover Insurance Group 2014 Employee Stock Purchase Plan, respectively.
Compensation cost for the Company’s stock-based awards and the related tax benefits were as follows:
|
|
Three Months Ended March 31, |
|
||||||
(in millions) |
|
2023 |
|
|
|
2022 |
|
||
Stock-based compensation expense |
|
$ |
7.1 |
|
|
|
$ |
6.7 |
|
Tax benefit |
|
|
(1.5 |
) |
|
|
|
(1.4 |
) |
Stock-based compensation expense, net of taxes |
|
$ |
5.6 |
|
|
|
$ |
5.3 |
|
Stock Options
Information on the Company’s stock option activity for the three months ended March 31, 2023 and 2022 is summarized below.
|
|
Three Months Ended March 31, |
|
|||||||||||||
|
|
2023 |
|
|
2022 |
|
||||||||||
(in whole shares and dollars) |
|
Shares |
|
|
Weighted Average |
|
|
Shares |
|
|
Weighted Average |
|
||||
Outstanding, beginning of period |
|
|
1,080,852 |
|
|
$ |
107.07 |
|
|
|
1,230,211 |
|
|
$ |
99.14 |
|
Granted |
|
|
135,019 |
|
|
|
140.01 |
|
|
|
140,339 |
|
|
|
139.51 |
|
Exercised |
|
|
(36,286 |
) |
|
|
96.03 |
|
|
|
(192,400 |
) |
|
|
81.48 |
|
Forfeited or cancelled |
|
|
(1,046 |
) |
|
|
115.79 |
|
|
|
(2,939 |
) |
|
|
116.43 |
|
Outstanding, end of period |
|
|
1,178,539 |
|
|
|
111.17 |
|
|
|
1,175,211 |
|
|
|
106.81 |
|
Restricted Stock Units
The Company currently issues time-based, market-based and performance-based restricted stock units to eligible employees, all of which generally vest after 3 years of continued employment.
The following tables summarize activity information about employee restricted stock units:
|
|
Three Months Ended March 31, |
|
|||||||||||||
|
|
2023 |
|
|
2022 |
|
||||||||||
(in whole shares and dollars) |
|
Shares |
|
|
Weighted |
|
|
Shares |
|
|
Weighted |
|
||||
Time-based restricted stock units: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Outstanding, beginning of period |
|
|
378,256 |
|
|
$ |
124.88 |
|
|
|
380,100 |
|
|
$ |
117.60 |
|
Granted |
|
|
146,464 |
|
|
|
138.71 |
|
|
|
143,208 |
|
|
|
138.20 |
|
Vested |
|
|
(125,686 |
) |
|
|
118.10 |
|
|
|
(114,978 |
) |
|
|
119.35 |
|
Forfeited |
|
|
(965 |
) |
|
|
123.64 |
|
|
|
(5,609 |
) |
|
|
119.92 |
|
Outstanding, end of period |
|
|
398,069 |
|
|
|
132.11 |
|
|
|
402,721 |
|
|
|
124.40 |
|
Performance-based and market-based restricted stock units: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Outstanding, beginning of period |
|
|
119,163 |
|
|
$ |
122.81 |
|
|
|
113,848 |
|
|
$ |
115.92 |
|
Granted |
|
|
50,115 |
|
|
|
137.90 |
|
|
|
47,954 |
|
|
|
140.36 |
|
Vested |
|
|
(44,781 |
) |
|
|
114.14 |
|
|
|
(39,338 |
) |
|
|
124.42 |
|
Forfeited |
|
|
(3,803 |
) |
|
|
109.07 |
|
|
|
(2,936 |
) |
|
|
121.73 |
|
Outstanding, end of period |
|
|
120,694 |
|
|
|
132.73 |
|
|
|
119,528 |
|
|
|
122.78 |
|
In the first three months of 2023 and 2022, the Company granted market-based awards totaling 21,789 and 19,057, respectively, to certain members of senior management, which are included in the table above as performance and market-based restricted stock activity. The vesting of these stock units is based on the relative total shareholder return (“TSR”) of the Company. This metric is generally based on relative TSR for a three-year period as compared to a pre-selected group of property and casualty companies. The fair value of market-based awards was estimated at the date of grant using a valuation model. These units have the potential to range from 0% to 150% of the shares disclosed. Included in the amount forfeited above in 2023 and 2022 are 2,836 and 1,282 shares, respectively, related to market-based awards that achieved a payout below 100%. These awards were forfeited in the first quarter of 2023 and 2022, respectively.
18
The Company also granted performance-based restricted stock units in 2023 and 2022, totaling 28,326 and 28,897, respectively, which are based upon the Company’s achievement of return on equity objectives. These units have the potential to range from 0% to 150% of the shares disclosed. Increases above the 100% target level are reflected as granted in the period after which performance-based stock unit goals are achieved. Decreases below the 100% target level are reflected as forfeited. Included in the amount granted above in 2023 and 2022 are 5,961 and 7,988 shares, respectively, related to performance-based awards that achieved a payout in excess of 100%. These awards vested in the first quarter of 2023 and 2022, respectively.
10. Earnings Per Share and Shareholders’ Equity Transactions
The following table provides weighted average share information used in the calculation of the Company’s basic and diluted earnings per share:
Diluted earnings per share for the three months ended March 31, 2023 and 2022 excludes 0.9 million and 0.1 million shares, respectively, issuable under the Company’s stock compensation plans because their effect would be antidilutive.
The Board of Directors authorized a stock repurchase program which provides for aggregate repurchases of the Company’s common stock of up to $1.3 billion. Under this program, the Company had approximately $330 million available at March 31, 2023. Under the repurchase authorization, the Company may repurchase, from time to time, common stock in amounts, at prices and at such times as the Company deems appropriate, subject to market conditions and other considerations. Repurchases may be executed using open market purchases, privately negotiated transactions, accelerated repurchase programs or other transactions. The Company is not required to purchase any specific number of shares or to make purchases by any certain date under this program.
19
11. Liabilities for Outstanding Claims, Losses and Loss Adjustment Expenses
Reserve Rollforward and Prior Year Development
The Company regularly updates its reserve estimates as new information becomes available and further events occur which may impact the resolution of unsettled claims. Reserve adjustments are reflected in results of operations as adjustments to losses and loss adjustment expenses (“LAE”). Often these adjustments are recognized in periods subsequent to the period in which the underlying policy was written, and loss event occurred. These types of subsequent adjustments are described as “prior years’ loss reserves.” Such development can be either favorable or unfavorable to the Company’s financial results and may vary by line of business. In this section, all amounts presented include catastrophe losses and LAE, unless otherwise indicated.
The table below provides a reconciliation of the gross beginning and ending reserve for unpaid losses and loss adjustment expenses.
|
|
Three Months Ended |
|
|||||
|
|
March 31, |
|
|||||
(in millions) |
|
2023 |
|
|
2022 |
|
||
Gross reserve for losses and LAE, beginning of period |
|
$ |
7,012.6 |
|
|
$ |
6,447.6 |
|
Reinsurance recoverable on unpaid losses |
|
|
1,748.6 |
|
|
|
1,693.8 |
|
Net reserve for losses and LAE, beginning of period |
|
|
5,264.0 |
|
|
|
4,753.8 |
|
Net incurred losses and LAE in respect of losses occurring in: |
|
|
|
|
|
|
||
Current year |
|
|
1,020.4 |
|
|
|
793.5 |
|
Prior years |
|
|
(3.0 |
) |
|
|
(6.0 |
) |
Total incurred losses and LAE |
|
|
1,017.4 |
|
|
|
787.5 |
|
Net payments of losses and LAE in respect of losses occurring in: |
|
|
|
|
|
|
||
Current year |
|
|
222.0 |
|
|
|
191.1 |
|
Prior years |
|
|
667.3 |
|
|
|
534.2 |
|
Total payments |
|
|
889.3 |
|
|
|
725.3 |
|
Net reserve for losses and LAE, end of period |
|
|
5,392.1 |
|
|
|
4,816.0 |
|
Reinsurance recoverable on unpaid losses |
|
|
1,751.3 |
|
|
|
1,696.2 |
|
Gross reserve for losses and LAE, end of period |
|
$ |
7,143.4 |
|
|
$ |
6,512.2 |
|
As a result of continuing trends in the Company’s business, reserves, including catastrophes, have been re-estimated for all prior accident years and were decreased by $3.0 million and $6.0 million in 2023 and 2022, respectively.
2023
For the three months ended March 31, 2023, net favorable loss and LAE development was $3.0 million, primarily as a result of favorable development of $22.4 million in Specialty, partially offset by unfavorable development of $16.6 million in Personal Lines and net unfavorable development of $2.8 million in Core Commercial. The favorable development in Specialty was primarily due to lower than expected losses of $11.4 million in the Professional and Executive division, primarily in accident years 2019 through 2022 and, to a lesser extent, lower than expected losses in the marine line in accident year 2022 and lower than expected losses in the surety line. The unfavorable development in Personal Lines was primarily due to higher than expected losses in the personal automobile line, within property damage coverages in accident year 2022, and higher than expected losses in the homeowners line in accident year 2022. The net unfavorable development in Core Commercial was primarily due to higher than expected losses within the monoline property and commercial automobile lines, partially offset by lower than expected losses in the commercial multiple peril and workers’ compensation lines.
2022
For the three months ended March 31, 2022, net favorable loss and LAE development was $6.0 million, primarily as a result of favorable development of $13.2 million in Specialty and net favorable development of $6.4 million in Core Commercial, partially offset by unfavorable development of $13.6 million in Personal Lines. The favorable development in Specialty was primarily due to lower than expected losses within the marine, specialty industrial and commercial property, professional and executive, and surety lines. The favorable development in Core Commercial was primarily due to lower than expected losses in the workers’ compensation line. The unfavorable development in Personal Lines was due to higher than expected losses of $13.9 million, in the homeowners line, primarily due to higher severity and longer cycle times in repair activity, primarily related to claims incurred in the fourth quarter of 2021.
20
12. Commitments and Contingencies
Legal Proceedings
The Company has been named a defendant in various legal proceedings arising in the normal course of business. In addition, the Company is involved, from time to time, in examinations, investigations and proceedings by governmental and self-regulatory agencies. The potential outcome of any such action or regulatory proceedings in which the Company has been named a defendant or the subject of an inquiry, examination or investigation, and its ultimate liability, if any, from such action or regulatory proceedings, is difficult to predict at this time. The ultimate resolutions of such proceedings are not expected to have a material effect on the Company's financial position, although they could have a material effect on the results of operations for a particular quarterly or annual period.
Residual Markets
The Company is required to participate in residual markets in various states, which generally pertain to high risk insureds, disrupted markets or lines of business or geographic areas where rates are regarded as excessive. The results of the residual markets are not subject to the predictability associated with the Company’s own managed business, and are significant to both the personal and commercial automobile lines of business.
13. Subsequent Events
There were no subsequent events requiring adjustment to the financial statements and no additional disclosure required in the notes to the consolidated financial statements.
21
PART I
ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE OF CONTENTS
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34 |
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34 |
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35 |
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35 |
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36 |
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37 |
22
Introduction
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist readers in understanding the interim consolidated results of operations and financial condition of The Hanover Insurance Group, Inc. and its subsidiaries (“THG”). Consolidated results of operations and financial condition are prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). This discussion should be read in conjunction with the interim consolidated financial statements and related footnotes included elsewhere in this Quarterly Report on Form 10-Q and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 23, 2023.
Results of operations include the accounts of The Hanover Insurance Company (“Hanover Insurance”) and Citizens Insurance Company of America (“Citizens”), our principal property and casualty companies, and certain other insurance and non-insurance subsidiaries. Our results of operations also include the results of our discontinued operations, consisting primarily of our former accident and health insurance business.
Executive Overview
Business operations consist of four operating segments: Core Commercial, Specialty, Personal Lines and Other.
Our strategy, which focuses on the independent agency distribution channel, supports THG’s commitment to our select independent agents. It is designed to generate profitable growth by leveraging the strengths of our distribution approach, including expansion of our agency footprint in underpenetrated geographies, as warranted. As part of that strategy, we have increased our capabilities in specialty markets and made investments designed to develop growth solutions for our agency distribution channel that meet the needs of our customers. Our goal is to grow responsibly in all of our businesses, while managing volatility.
During the three months ended March 31, 2023, our net loss was $12.0 million, compared to $104.9 million of net income for the three months ended March 31, 2022, a decrease of $116.9 million, primarily due to lower operating income.
Operating income before interest expense and income taxes (a non-GAAP financial measure; see also “Results of Operations – Consolidated – Non-GAAP Financial Measures”) was $13.2 million for the three months ended March 31, 2023, compared to $154.4 million for the three months ended March 31, 2022, a decrease of $141.2 million. This decrease was primarily due to higher catastrophe losses in each of our segments and, to a lesser extent, higher current accident year losses in Personal Lines. The higher catastrophe losses were primarily due to widespread wind, hail and tornadic activity and several severe freeze events across multiple states in the first three months of 2023. The higher Personal Lines current accident year losses were primarily due to higher loss severity, as a result of continued inflation and supply chain disruptions.
Pre-tax catastrophe losses were $175.0 million for the three months ended March 31, 2023, compared to $45.5 million during the same period of 2022, an increase of $129.5 million. Net favorable development on prior years’ loss reserves was $3.0 million for the three months ended March 31, 2023, compared to $6.0 million for the three months ended March 31, 2022, a decrease of $3.0 million.
Due to persistent supply chain disruptions emerging from the COVID-19 pandemic (“Pandemic”), and significant inflation in the U.S economy, among other factors outside our control, we are experiencing substantially higher claims costs, particularly in our automobile and homeowners lines of business. Additionally, several other residual Pandemic uncertainties persist, including evolving driving patterns and court caseload backlogs. Although we are taking actions to address our higher claims costs, such elevated costs may affect the property and casualty insurance industry, our business, and our financial results over future periods. (See “Contingencies and Regulatory Matters” and “Item 1A – Risk Factors” for further discussion).
Core Commercial
Core Commercial includes two distinct businesses, small commercial and middle market, both of which focus on account business, including coverage for commercial multiple peril, commercial automobile, workers’ compensation and other (monoline general liability, ancillary professional, commercial umbrella, and monoline property). Small commercial focuses on small businesses, with annual policy premiums generally up to $50,000. Small commercial utilizes TAP sales, a quoting platform that has enhanced the agents' ease of doing business with the Company, and has generated approximately a 20% increase in new business submissions during the first quarter of 2023 compared to the same period in 2022. Middle market provides coverage to mid-sized businesses with annual policy premiums generally between $50,000 and $500,000. Middle market offers coverage in distinct industry segments, including technology, manufacturing, human services, retail, real estate, and others. We believe that our account-focused approach to the small commercial market and distinctiveness in the middle market, including our diversified portfolio of products, delivers significant value to agents and policyholders. We continue to pursue our core strategy of developing strong relationships with retail agents, enhanced franchise value through selective distribution, distinctive products and coverages, and through continued investment in products for additional industry segmentation.
Net premiums written increased 7.3% in the first three months of 2023, compared to the same period in 2022, primarily driven by pricing and increased new business. Underwriting results decreased in the first three months of 2023, primarily due to higher catastrophe losses. The competitive nature of the Core Commercial market requires us to be highly disciplined in our underwriting process to ensure that we write business at acceptable margins, and we continue to seek rate increases across many lines of business.
23
Specialty
Specialty offers a comprehensive suite of products focused predominately on small to mid-sized businesses. This includes numerous specialized product areas that are organized into four distinct divisions – Professional and Executive Lines, Specialty Property and Casualty (“Specialty P&C”), Marine, and Surety and Other. We believe that this diverse set of Specialty products, distributed primarily through retail agents, supplemented by select specialists, helps to enhance our overall agent value and increase growth opportunities by providing agents easier access to placement solutions for Specialty needs, including those that complement Core Commercial accounts.
Net premiums written increased 7.1% in the first three months of 2023, compared to the same period in 2022, primarily due to pricing and increased new business. Underwriting results decreased slightly in the first three months of 2023 compared to the same period in 2022, primarily due to higher catastrophe losses, partially offset by higher favorable development on prior years’ loss reserves and earned premium growth. The competitive nature of the Specialty market requires us to be highly disciplined in our underwriting process to ensure that we write business at acceptable margins, and we continue to seek rate increases across many lines of business.
Personal Lines
Personal Lines focuses on working with high quality, value-oriented agencies that deliver consultative selling to customers and stress the importance of account rounding, which is the conversion of single policy customers to accounts with multiple policies and/or additional coverages, to address customers’ broader needs and objectives. Approximately 87% of our policies in force have been issued to customers with multiple policies and/or coverages with us. We are focused on seeking profitable growth opportunities, building a distinctive position in the market in order to meet our customers’ needs, and diversifying geographically. We continue to seek appropriate rate increases that meet or exceed underlying loss cost trends, subject to regulatory and competitive considerations.
Net premiums written increased by 10.1% in the first three months of 2023, compared to the same period in 2022, primarily due to renewal price increases and, to a lesser extent, increased new business production. Underwriting results decreased in the first three months of 2023, primarily due to higher catastrophe losses and higher current accident losses due to increased severity in our personal automobile line.
Description of Operating Segments
Primary business operations include insurance products and services currently provided through four operating segments: Core Commercial, Specialty, Personal Lines and Other. Core Commercial includes commercial multiple peril, commercial automobile, workers’ compensation, and other commercial lines coverages provided to small and mid-sized businesses. Specialty includes four divisions of business: Professional and Executive Lines, Specialty P&C, Marine, and Surety and Other. Specialty P&C includes coverages such as program business (providing commercial insurance to markets with specialized coverage or risk management needs related to groups of similar businesses), specialty industrial and commercial property, excess and surplus lines and specialty general liability coverage. Personal Lines includes personal automobile, homeowners and other personal coverages, such as umbrella. Included in the “Other” segment are Opus Investment Management, Inc., which markets investment management services to institutions, pension funds, and other organizations; earnings on holding company assets; holding company and other expenses, including certain costs associated with retirement benefits due to our former life insurance employees and agents; and our run-off voluntary assumed property and casualty pools and run-off direct asbestos and environmental businesses.
We report interest expense on debt separately from the earnings of our operating segments. This consists primarily of interest on our senior and subordinated debentures.
Results of Operations – Consolidated
Consolidated net loss for the three months ended March 31, 2023 was $12.0 million, compared to net income of $104.9 million for the three months ended March 31, 2022, a decrease of $116.9 million. The change year-over-year was primarily due to lower operating income. Operating income before interest expense and income taxes was $13.2 million for the three months ended March 31, 2023, compared to $154.4 million for the three months ended March 31, 2022, a decrease of $141.2 million. The decrease in operating income before interest expense and income taxes was primarily due to higher catastrophe losses and, to a lesser extent, higher current accident year losses in Personal Lines.
24
The following table reflects operating income before interest expense and income taxes for each operating segment and a reconciliation to consolidated net income (loss) from operating income before interest expense and income taxes (a non-GAAP measure).
|
|
Three Months Ended |
|
|||||
|
|
March 31, |
|
|||||
(in millions) |
|
2023 |
|
|
2022 |
|
||
Operating income (loss) before interest expense and income taxes: |
|
|
|
|
|
|
||
Core Commercial |
|
$ |
11.2 |
|
|
$ |
67.5 |
|
Specialty |
|
|
48.3 |
|
|
|
50.0 |
|
Personal Lines |
|
|
(46.6 |
) |
|
|
36.3 |
|
Other |
|
|
0.3 |
|
|
|
0.6 |
|
Operating income before interest expense and income taxes |
|
|
13.2 |
|
|
|
154.4 |
|
Interest expense on debt |
|
|
(8.5 |
) |
|
|
(8.5 |
) |
Operating income before income taxes |
|
|
4.7 |
|
|
|
145.9 |
|
Income tax expense on operating income |
|
|
(0.1 |
) |
|
|
(28.2 |
) |
Operating income |
|
|
4.6 |
|
|
|
117.7 |
|
Non-operating items: |
|
|
|
|
|
|
||
Net realized and unrealized investment losses |
|
|
(23.0 |
) |
|
|
(15.9 |
) |
Other non-operating |
|
|
0.8 |
|
|
|
— |
|
Income tax benefit on non-operating items |
|
|
5.6 |
|
|
|
3.5 |
|
Income (loss) from continuing operations, net of taxes |
|
|
(12.0 |
) |
|
|
105.3 |
|
Discontinued operations (net of taxes): |
|
|
|
|
|
|
||
Loss from discontinued life businesses |
|
|
— |
|
|
|
(0.4 |
) |
Net income (loss) |
|
$ |
(12.0 |
) |
|
$ |
104.9 |
|
Non-GAAP Financial Measures
In addition to consolidated net income (loss), discussed above, we assess our financial performance based upon pre-tax “operating income,” and we assess the operating performance of each of our four operating segments based upon the pre-tax operating income (loss) generated by each segment. As reflected in the table above, operating income before interest expense and income taxes excludes interest expense on debt and certain other items, which we believe are not indicative of our core operations, such as net realized and unrealized investment gains and losses. Such gains and losses are excluded since they are determined by interest rates, financial markets and the timing of sales. Also, operating income before interest expense and income taxes excludes net gains and losses on disposals of businesses, gains and losses related to the repayment of debt, discontinued operations, costs to acquire businesses, restructuring costs, the cumulative effect of accounting changes and certain other items. Although the items excluded from operating income before interest expense and income taxes are important components in understanding and assessing our overall financial performance, we believe a discussion of operating income before interest expense and income taxes enhances an investor’s understanding of our results of operations by highlighting net income (loss) attributable to the core operations of the business. However, operating income before interest expense and income taxes, which is a non-GAAP measure, should not be construed as a substitute for income before income taxes or income (loss) from continuing operations, and operating income should not be construed as a substitute for net income (loss).
Catastrophe losses and prior years’ reserve development are significant components in understanding and assessing the financial performance of our business. Management reviews and evaluates catastrophes and prior years’ reserve development separately from the other components of earnings. References to “current accident year underwriting results” exclude prior accident year reserve development and may also be presented “excluding catastrophes.” Prior years’ reserve development and catastrophes are not predictable as to timing or the amount that will affect the results of our operations and have an effect on each year’s operating and net income (loss). Management believes that providing certain financial metrics and trends excluding the effects of catastrophes and prior years’ reserve development helps investors to understand the variability in periodic earnings and to evaluate the underlying performance of our operations. Discussion of catastrophe losses in this Management’s Discussion and Analysis includes development on prior years’ catastrophe reserves and, unless otherwise indicated, such development is excluded from discussions of prior year loss and loss adjustment expenses (“LAE”) reserve development.
25
Results of Operations – Segments
The following is our discussion and analysis of the results of operations by business segment. The operating results are presented before interest expense, income taxes and other items, which management believes are not indicative of our core operations, including realized gains and losses, as well as unrealized gains and losses on equity securities, and the results of discontinued operations.
The following table summarizes the results of operations for the periods indicated:
|
|
Three Months Ended |
|
||||||
|
|
March 31, |
|
||||||
(in millions) |
|
2023 |
|
|
|
2022 |
|
||
Operating revenues |
|
|
|
|
|
|
|
||
Net premiums written |
|
$ |
1,421.5 |
|
|
|
$ |
1,312.3 |
|
Net premiums earned |
|
$ |
1,380.0 |
|
|
|
$ |
1,263.8 |
|
Net investment income |
|
|
78.7 |
|
|
|
|
76.9 |
|
Other income |
|
|
8.0 |
|
|
|
|
5.9 |
|
Total operating revenues |
|
|
1,466.7 |
|
|
|
|
1,346.6 |
|
Losses and operating expenses |
|
|
|
|
|
|
|
||
Losses and LAE |
|
|
1,017.4 |
|
|
|
|
787.5 |
|
Amortization of deferred acquisition costs |
|
|
288.8 |
|
|
|
|
262.9 |
|
Other operating expenses |
|
|
147.3 |
|
|
|
|
141.8 |
|
Total losses and operating expenses |
|
|
1,453.5 |
|
|
|
|
1,192.2 |
|
Operating income before interest expense and income taxes |
|
$ |
13.2 |
|
|
|
$ |
154.4 |
|
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Operating income before interest expense and income taxes was $13.2 million for the three months ended March 31, 2023, compared to $154.4 million for the three months ended March 31, 2022, a decrease of $141.2 million. This decrease was primarily due to higher catastrophe losses in each of our segments and, to a lesser extent, higher current accident year losses in Personal Lines. The higher catastrophe losses were primarily due to widespread wind, hail and tornadic activity, and several severe freeze events, across multiple states in the first three months of 2023. The higher Personal Lines current accident year losses were primarily due to higher loss severity, primarily in our personal automobile line, as a result of continued inflation and supply chain disruptions.
Net premiums written increased $109.2 million for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily due to pricing and increased new business.
Production and Underwriting Results
The following tables summarize premiums written on a gross and net basis, net premiums earned, and loss (including catastrophe losses) and LAE, expense, and combined ratios for our Core Commercial, Specialty and Personal Lines segments. Loss, LAE, catastrophe loss and combined ratios shown below include prior year reserve development. These items are not meaningful for our Other segment.
|
|
Three Months Ended March 31, 2023 |
|
|||||||||||||||||||||||||
(dollars in millions) |
|
Gross |
|
|
Net |
|
|
Net |
|
|
Catastrophe |
|
|
Loss |
|
|
Expense |
|
|
Combined |
|
|||||||
Core Commercial |
|
$ |
634.1 |
|
|
$ |
565.3 |
|
|
$ |
507.4 |
|
|
|
12.6 |
|
|
|
71.8 |
|
|
|
32.9 |
|
|
|
104.7 |
|
Specialty |
|
|
392.5 |
|
|
|
324.3 |
|
|
|
311.7 |
|
|
|
6.9 |
|
|
|
54.6 |
|
|
|
35.3 |
|
|
|
89.9 |
|
Personal Lines |
|
|
550.7 |
|
|
|
531.9 |
|
|
|
560.9 |
|
|
|
16.0 |
|
|
|
86.1 |
|
|
|
26.1 |
|
|
|
112.2 |
|
Total |
|
$ |
1,577.3 |
|
|
$ |
1,421.5 |
|
|
$ |
1,380.0 |
|
|
|
12.7 |
|
|
|
73.7 |
|
|
|
30.7 |
|
|
|
104.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
Three Months Ended March 31, 2022 |
|
|||||||||||||||||||||||||
(dollars in millions) |
|
Gross |
|
|
Net |
|
|
Net |
|
|
Catastrophe |
|
|
Loss |
|
|
Expense |
|
|
Combined |
|
|||||||
Core Commercial |
|
$ |
591.9 |
|
|
$ |
526.6 |
|
|
$ |
474.7 |
|
|
|
4.1 |
|
|
|
60.2 |
|
|
|
32.8 |
|
|
|
93.0 |
|
Specialty |
|
|
379.1 |
|
|
|
302.8 |
|
|
|
283.8 |
|
|
|
2.7 |
|
|
|
52.3 |
|
|
|
35.4 |
|
|
|
87.7 |
|
Personal Lines |
|
|
499.1 |
|
|
|
482.9 |
|
|
|
505.3 |
|
|
|
3.6 |
|
|
|
69.9 |
|
|
|
27.2 |
|
|
|
97.1 |
|
Total |
|
$ |
1,470.1 |
|
|
$ |
1,312.3 |
|
|
$ |
1,263.8 |
|
|
|
3.6 |
|
|
|
62.3 |
|
|
|
31.1 |
|
|
|
93.4 |
|
26
The following table summarizes U.S. GAAP underwriting results for our Core Commercial, Specialty, Personal Lines and Other segments and reconciles them to operating income (loss) before interest expense and income taxes.
|
Three Months Ended March 31, |
|
|||||||||||||||||||||||||||||||||||||
|
2023 |
|
|
2022 |
|
||||||||||||||||||||||||||||||||||
(in millions) |
Core |
Specialty |
Personal |
Other |
Total |
Core |
Specialty |
Personal |
Other |
Total |
|
||||||||||||||||||||||||||||
Underwriting |
$ |
42.6 |
|
|
$ |
34.1 |
|
|
$ |
29.0 |
|
|
$ |
— |
|
|
$ |
105.7 |
|
|
$ |
45.5 |
|
|
$ |
28.3 |
|
|
$ |
44.1 |
|
|
$ |
— |
|
|
$ |
117.9 |
|
Prior year |
|
(3.5 |
) |
|
|
18.1 |
|
|
|
(11.6 |
) |
|
|
— |
|
|
|
3.0 |
|
|
|
6.4 |
|
|
|
13.2 |
|
|
|
(13.6 |
) |
|
|
— |
|
|
|
6.0 |
|
Prior year |
|
0.7 |
|
|
|
4.3 |
|
|
|
(5.0 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Current year |
|
(64.6 |
) |
|
|
(25.8 |
) |
|
|
(84.6 |
) |
|
|
— |
|
|
|
(175.0 |
) |
|
|
(19.7 |
) |
|
|
(7.6 |
) |
|
|
(18.2 |
) |
|
|
— |
|
|
|
(45.5 |
) |
Underwriting |
|
(24.8 |
) |
|
|
30.7 |
|
|
|
(72.2 |
) |
|
|
— |
|
|
|
(66.3 |
) |
|
|
32.2 |
|
|
|
33.9 |
|
|
|
12.3 |
|
|
|
— |
|
|
|
78.4 |
|
Net investment |
|
36.1 |
|
|
|
17.0 |
|
|
|
22.6 |
|
|
|
3.0 |
|
|
|
78.7 |
|
|
|
35.4 |
|
|
|
16.2 |
|
|
|
22.6 |
|
|
|
2.7 |
|
|
|
76.9 |
|
Fees and other |
|
1.2 |
|
|
|
1.8 |
|
|
|
4.3 |
|
|
|
0.7 |
|
|
|
8.0 |
|
|
|
1.0 |
|
|
|
1.3 |
|
|
|
2.8 |
|
|
|
0.8 |
|
|
|
5.9 |
|
Other operating |
|
(1.3 |
) |
|
|
(1.2 |
) |
|
|
(1.3 |
) |
|
|
(3.4 |
) |
|
|
(7.2 |
) |
|
|
(1.1 |
) |
|
|
(1.4 |
) |
|
|
(1.4 |
) |
|
|
(2.9 |
) |
|
|
(6.8 |
) |
Operating income |
$ |
11.2 |
|
|
$ |
48.3 |
|
|
$ |
(46.6 |
) |
|
$ |
0.3 |
|
|
$ |
13.2 |
|
|
$ |
67.5 |
|
|
$ |
50.0 |
|
|
$ |
36.3 |
|
|
$ |
0.6 |
|
|
$ |
154.4 |
|
Core Commercial
Core Commercial net premiums written were $565.3 million for the three months ended March 31, 2023, compared to $526.6 million for the three months ended March 31, 2022. This $38.7 million increase was primarily driven by pricing and increased new business.
Core Commercial underwriting loss for the three months ended March 31, 2023 was $24.8 million, compared to an underwriting profit of $32.2 million for the three months ended March 31, 2022, a decrease of $57.0 million. Catastrophe losses for the three months ended March 31, 2023 were $63.9 million, compared to $19.7 million for the three months ended March 31, 2022. The $44.2 million increase was due to several severe freeze events and widespread wind, hail and tornadic activity across multiple states. Net unfavorable development on prior years’ loss reserves for the three months ended March 31, 2023 was $3.5 million, compared to $6.4 million of favorable development for the three months ended March 31, 2022, an unfavorable change of $9.9 million.
Core Commercial current accident year underwriting profit, excluding catastrophes, was $42.6 million for the three months ended March 31, 2023, compared to $45.5 million for the three months ended March 31, 2022. This $2.9 million decrease was primarily driven by higher current accident year losses in our commercial automobile line, partially offset by earned premium growth.
We continue to manage underwriting performance through rate actions, risk selection and mitigation, pricing segmentation, specific underwriting actions and targeted new business growth. Our ability to achieve overall rate increases is affected by many factors, including regulatory activity and the competitive pricing environment, particularly within the workers’ compensation line.
Specialty
Specialty net premiums written were $324.3 million for the three months ended March 31, 2023, compared to $302.8 million for the three months ended March 31, 2022. This $21.5 million increase was primarily driven by pricing and increased new business.
27
Specialty underwriting profit for the three months ended March 31, 2023 was $30.7 million, compared to $33.9 million for the three months ended March 31, 2022, a decrease of $3.2 million. Catastrophe losses for the three months ended March 31, 2023 were $21.5 million, compared to $7.6 million for the three months ended March 31, 2022, an increase of $13.9 million. Net favorable development on prior years’ loss reserves for the three months ended March 31, 2023 was $18.1 million, compared to $13.2 million for the three months ended March 31, 2022, an increase of $4.9 million.
Specialty current accident year underwriting profit, excluding catastrophes, was $34.1 million for the three months ended March 31, 2023, compared to $28.3 million for the three months ended March 31, 2022. This $5.8 million increase was primarily driven by earned premium growth and lower current accident year losses in our marine line.
We continue to manage underwriting performance through rate actions, risk selection and mitigation, pricing segmentation, specific underwriting actions and targeted new business growth. Our ability to achieve overall rate increases is affected by many factors, including regulatory activity and the competitive pricing environment.
Personal Lines
Personal Lines net premiums written were $531.9 million for the three months ended March 31, 2023, compared to $482.9 million for the three months ended March 31, 2022. This $49.0 million increase was primarily due to renewal price increases and, to a lesser extent, increased new business.
Net premiums written in the personal automobile line of business for the three months ended March 31, 2023 were $323.0 million, compared to $298.4 million for the three months ended March 31, 2022, an increase of $24.6 million, or 8.2%. Personal automobile policies in force increased by 4.5%. Net premiums written in the homeowners and other lines of business for the three months ended March 31, 2023 were $208.9 million, compared to $184.5 million for the three months ended March 31, 2022, an increase of $24.4 million, or 13.2%. Homeowners policies in force increased by 4.6%.
Personal Lines underwriting loss for the three months ended March 31, 2023 was $72.2 million, compared to an underwriting profit of $12.3 million for the three months ended March 31, 2022, an unfavorable change of $84.5 million. Catastrophe losses for the three months ended March 31, 2023 were $89.6 million, compared to $18.2 million for the three months ended March 31, 2022. The increase of $71.4 million was due to widespread wind, hail and tornadic activity, and several severe freeze events, across multiple states. Net unfavorable development on prior years’ loss reserves for the three months ended March 31, 2023 was $11.6 million, compared to $13.6 million for the three months ended March 31, 2022, a decrease of $2.0 million.
Personal Lines current accident year underwriting profit, excluding catastrophes, was $29.0 million for the three months ended March 31, 2023, compared to $44.1 million for the three months ended March 31, 2022. This $15.1 million decrease was primarily due to higher current accident year losses, partially offset by lower performance-based compensation expenses. Higher current accident year losses were primarily due to increased loss severity in our personal automobile line and, to a lesser extent, an increase in automobile loss frequency compared to relatively low levels experienced in the three months ended March 31, 2022. We experienced an increase in loss severity, with inflationary pressures and ongoing supply chain issues, resulting in higher used vehicle prices and higher cost of parts and other repair costs. In addition, homeowners losses have increased due to higher property severity, as a result of higher inflation, and an increase in average severity of large loss activity. We have experienced the effect of inflationary pressures on building material and labor costs, supply chain constraints that increase building and repair times, and an increase in temporary lodging and additional living expense reimbursements.
We have been able to obtain rate increases in our Personal Lines markets and believe that our ability to obtain increases will continue over the long-term. Our ability to maintain Personal Lines net premiums written may be affected, however, by price competition, and regulatory and legal developments. Additionally, these factors, along with the aforementioned issues contributing to our recent increase in losses, may also affect our ability to maintain and improve underwriting results. We monitor these trends and consider them in our rate actions.
Other
Our Other segment had operating income of $0.3 million for the three months ended March 31, 2023, compared to $0.6 million for the three months ended March 31, 2022, a decrease of $0.3 million.
28
Reserve for Losses and Loss Adjustment Expenses
The table below provides a reconciliation of the gross beginning and ending reserve for unpaid losses and loss adjustment expenses.
|
|
Three Months Ended |
|
|||||
|
|
March 31, |
|
|||||
(in millions) |
|
2023 |
|
|
2022 |
|
||
Gross reserve for losses and LAE, beginning of period |
|
$ |
7,012.6 |
|
|
$ |
6,447.6 |
|
Reinsurance recoverable on unpaid losses |
|
|
1,748.6 |
|
|
|
1,693.8 |
|
Net reserve for losses and LAE, beginning of period |
|
|
5,264.0 |
|
|
|
4,753.8 |
|
Net incurred losses and LAE in respect of losses occurring in: |
|
|
|
|
|
|
||
Current year |
|
|
1,020.4 |
|
|
|
793.5 |
|
Prior year non-catastrophe loss development |
|
|
(3.0 |
) |
|
|
(6.0 |
) |
Total incurred losses and LAE |
|
|
1,017.4 |
|
|
|
787.5 |
|
Net payments of losses and LAE in respect of losses occurring in: |
|
|
|
|
|
|
||
Current year |
|
|
222.0 |
|
|
|
191.1 |
|
Prior years |
|
|
667.3 |
|
|
|
534.2 |
|
Total payments |
|
|
889.3 |
|
|
|
725.3 |
|
Net reserve for losses and LAE, end of period |
|
|
5,392.1 |
|
|
|
4,816.0 |
|
Reinsurance recoverable on unpaid losses |
|
|
1,751.3 |
|
|
|
1,696.2 |
|
Gross reserve for losses and LAE, end of period |
|
$ |
7,143.4 |
|
|
$ |
6,512.2 |
|
The table below summarizes the gross reserve for losses and LAE by line of business and division.
|
|
March 31, |
|
|
December 31, |
|
||
(in millions) |
|
2023 |
|
|
2022 |
|
||
Commercial multiple peril |
|
$ |
1,563.2 |
|
|
$ |
1,556.6 |
|
Workers’ compensation |
|
|
736.9 |
|
|
|
735.0 |
|
Commercial automobile |
|
|
486.1 |
|
|
|
477.7 |
|
Other core commercial |
|
|
601.6 |
|
|
|
581.6 |
|
Total Core Commercial |
|
|
3,387.8 |
|
|
|
3,350.9 |
|
Specialty Property & Casualty |
|
|
880.7 |
|
|
|
820.6 |
|
Professional and Executive Lines |
|
|
518.8 |
|
|
|
529.3 |
|
Marine |
|
|
134.2 |
|
|
|
136.0 |
|
Surety and Other |
|
|
110.9 |
|
|
|
112.2 |
|
Total Specialty |
|
|
1,644.6 |
|
|
|
1,598.1 |
|
Personal automobile |
|
|
1,620.3 |
|
|
|
1,633.2 |
|
Homeowners and Other |
|
|
426.0 |
|
|
|
364.9 |
|
Total Personal Lines |
|
|
2,046.3 |
|
|
|
1,998.1 |
|
Total Other |
|
|
64.7 |
|
|
|
65.5 |
|
Total loss and LAE reserves |
|
$ |
7,143.4 |
|
|
$ |
7,012.6 |
|
Loss and LAE reserves in our “Other core commercial” lines include monoline general liability, commercial umbrella, and monoline property. “Specialty Property & Casualty” includes program business, specialty industrial and commercial property, excess and surplus lines, and specialty general liability coverage. “Professional and Executive Lines” includes professional and management liability, fidelity and crime, and other property and liability lines for healthcare firms. Loss and LAE reserves in our “Total Other” segment relate to our run-off voluntary assumed property and casualty reinsurance pools business and our run-off direct asbestos and environmental business.
The following table summarizes prior year (favorable) unfavorable development for the periods indicated:
|
|
Three Months Ended March 31, |
|
|||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
||||||||||||||||||
(in millions) |
|
Loss & LAE |
|
|
Catastrophe |
|
|
Total |
|
|
Loss & LAE |
|
|
Catastrophe |
|
|
Total |
|
||||||
Core Commercial |
|
$ |
3.5 |
|
|
$ |
(0.7 |
) |
|
$ |
2.8 |
|
|
$ |
(6.4 |
) |
|
$ |
— |
|
|
$ |
(6.4 |
) |
Specialty |
|
|
(18.1 |
) |
|
|
(4.3 |
) |
|
|
(22.4 |
) |
|
|
(13.2 |
) |
|
|
— |
|
|
|
(13.2 |
) |
Personal Lines |
|
|
11.6 |
|
|
|
5.0 |
|
|
|
16.6 |
|
|
|
13.6 |
|
|
|
— |
|
|
|
13.6 |
|
Other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total prior year favorable development |
|
$ |
(3.0 |
) |
|
$ |
— |
|
|
$ |
(3.0 |
) |
|
$ |
(6.0 |
) |
|
$ |
— |
|
|
$ |
(6.0 |
) |
29
It is not possible to know whether the factors that affected loss reserves in the first three months of 2023 will also occur in future periods. We encourage you to read our 2022 Annual Report on Form 10-K for more information about our reserving process and the judgments, uncertainties and risks associated therewith.
Catastrophe Loss Development
For the three months ended March 31, 2023 and 2022, total catastrophe loss development was not meaningful in both periods.
2023 Loss and LAE Development, excluding catastrophes
For the three months ended March 31, 2023, net favorable loss and LAE development, excluding catastrophes, was $3.0 million. Specialty favorable loss and LAE development of $18.1 million was primarily due to lower than expected losses of $11.3 million in our Professional and Executive lines, notably in accident years 2019 through 2022 and, to a lesser extent, lower than expected losses in our surety line. Personal Lines unfavorable loss and LAE development of $11.6 million was primarily due to higher than expected losses in our personal automobile line within property damage coverages in accident year 2022. Core Commercial unfavorable loss and LAE development of $3.5 million was primarily due to higher than expected losses and LAE in our commercial automobile and commercial multiple peril lines.
2022 Loss and LAE Development, excluding catastrophes
For the three months ended March 31, 2022, net favorable loss and LAE development, excluding catastrophes, was $6.0 million. Specialty favorable loss and LAE development of $13.2 million was primarily due to lower than expected losses in our marine, specialty industrial and commercial property, professional and executive, and surety lines. Core Commercial favorable loss and LAE development of $6.4 million was primarily due to lower than expected losses in the workers’ compensation line, primarily in accident year 2020. Personal Lines unfavorable loss and LAE development of $13.6 million was primarily due to higher than expected losses in our homeowners line of $13.9 million. The increase in homeowners losses was primarily due to higher severity and longer cycle times in repair activity, primarily related to claims incurred in the fourth quarter of 2021.
Reinsurance Recoverables
Reinsurance recoverables were $1,972.7 million and $1,964.5 million at March 31, 2023 and December 31, 2022, respectively, of which $114.8 million and $111.1 million, respectively, represent billed recoverables. A reinsurance recoverable is billed after an eligible reinsured claim is paid by an insurer. Billed reinsurance recoverables related to the Michigan Catastrophic Claims Association (the “MCCA”) were $59.5 million and $50.7 million at March 31, 2023 and December 31, 2022, and billed non-MCCA reinsurance recoverables totaled $55.3 million and $60.4 million at March 31, 2023 and December 31, 2022, respectively. At March 31, 2023, and December 31, 2022, there were no balances outstanding greater than 90 days.
Investments
Investment Results
Net investment income before income taxes was as follows:
|
|
Three Months Ended March 31, |
|
||||||
(dollars in millions) |
|
2023 |
|
|
|
2022 |
|
||
Fixed maturities |
|
$ |
68.3 |
|
|
|
$ |
55.8 |
|
Limited partnerships |
|
|
5.3 |
|
|
|
|
15.2 |
|
Mortgage loans |
|
|
4.0 |
|
|
|
|
4.4 |
|
Equity securities |
|
|
1.9 |
|
|
|
|
3.6 |
|
Other investments |
|
|
2.5 |
|
|
|
|
0.8 |
|
Investment expenses |
|
|
(3.3 |
) |
|
|
|
(2.9 |
) |
Net investment income |
|
$ |
78.7 |
|
|
|
$ |
76.9 |
|
Earned yield, fixed maturities |
|
|
3.27 |
% |
|
|
|
2.95 |
% |
Earned yield, total portfolio |
|
|
3.34 |
% |
|
|
|
3.52 |
% |
The increase in net investment income for the three months ended March 31, 2023 was primarily due to the impact of higher new money yields and the continued investment of operational cashflows, partially offset by lower partnership income. Income from partnerships can vary significantly from period to period based on the performance in the underlying portfolios. Higher partnership income for the three months ended March 31, 2022 was driven by substantial valuation increases across all private capital strategies and is not indicative of the long-term targeted return for this asset class.
30
Investment Portfolio
We held cash and investment assets diversified across several asset classes, as follows:
|
|
March 31, 2023 |
|
|
|
December 31, 2022 |
|
|
||||||||||
(dollars in millions) |
|
Carrying |
|
|
% of Total |
|
|
|
Carrying |
|
|
% of Total |
|
|
||||
Fixed maturities, at fair value |
|
$ |
7,678.2 |
|
|
|
86.4 |
|
% |
|
$ |
7,481.8 |
|
|
|
84.9 |
|
% |
Limited partnerships and other investments |
|
|
410.3 |
|
|
|
4.6 |
|
|
|
|
397.5 |
|
|
|
4.5 |
|
|
Mortgage and other loans |
|
|
384.7 |
|
|
|
4.3 |
|
|
|
|
388.6 |
|
|
|
4.4 |
|
|
Equity securities, at fair value |
|
|
234.8 |
|
|
|
2.7 |
|
|
|
|
241.9 |
|
|
|
2.7 |
|
|
Cash and cash equivalents |
|
|
181.5 |
|
|
|
2.0 |
|
|
|
|
305.0 |
|
|
|
3.5 |
|
|
Total cash and investments |
|
$ |
8,889.5 |
|
|
|
100.0 |
|
% |
|
$ |
8,814.8 |
|
|
|
100.0 |
|
% |
Cash and Investments
Total cash and investments increased $74.7 million, or 0.8%, for the three months ended March 31, 2023 as compared to December 31, 2022, primarily due to net market value appreciation, partially offset by the funding of financing activities, including our dividend payment.
The following table provides information about the investment types of our fixed maturities portfolio:
|
|
March 31, 2023 |
|
|||||||||||||||
(in millions) |
|
Weighted Average Quality |
|
Amortized Cost, Net of Allowance for Credit Losses |
|
|
Fair Value |
|
|
Net Unrealized Loss |
|
|
Change in Net |
|
||||
U.S. Treasury and government agencies |
|
AAA |
|
$ |
484.0 |
|
|
$ |
432.9 |
|
|
$ |
(51.1 |
) |
|
$ |
7.6 |
|
Foreign government |
|
BBB+ |
|
|
2.2 |
|
|
|
2.2 |
|
|
|
— |
|
|
|
0.1 |
|
Municipals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Taxable |
|
AA |
|
|
1,237.5 |
|
|
|
1,105.8 |
|
|
|
(131.7 |
) |
|
|
31.0 |
|
Tax-exempt |
|
AA |
|
|
20.5 |
|
|
|
20.0 |
|
|
|
(0.5 |
) |
|
|
0.2 |
|
Corporate |
|
BBB+ |
|
|
4,060.9 |
|
|
|
3,779.9 |
|
|
|
(281.0 |
) |
|
|
53.4 |
|
Asset-backed: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Residential mortgage-backed |
|
AAA |
|
|
1,278.0 |
|
|
|
1,153.1 |
|
|
|
(124.9 |
) |
|
|
16.6 |
|
Commercial mortgage-backed |
|
AAA |
|
|
925.9 |
|
|
|
842.5 |
|
|
|
(83.4 |
) |
|
|
4.3 |
|
Other asset-backed |
|
AA |
|
|
364.2 |
|
|
|
341.8 |
|
|
|
(22.4 |
) |
|
|
4.5 |
|
Total fixed maturities |
|
A+ |
|
$ |
8,373.2 |
|
|
$ |
7,678.2 |
|
|
$ |
(695.0 |
) |
|
$ |
117.7 |
|
The change in net unrealized loss on fixed maturities was primarily due to lower prevailing interest rates, partially offset by wider credit spreads.
Amortized cost and fair value by rating category were as follows:
31
Based on ratings by the National Association of Insurance Commissioners (“NAIC”), approximately 95% and 96% of the fixed maturity portfolio consisted of investment grade securities at March 31, 2023 and December 31, 2022, respectively. The quality of our fixed maturity portfolio remains strong based on ratings, capital structure position, support through guarantees, underlying security, issuer diversification and yield curve position. Our U.S. Treasury and government agencies fixed maturities are directly or indirectly backed by the full faith and credit of the U.S. government. Our municipal bonds include revenue bonds and general obligations of state and local issuers. Corporate fixed maturities include publicly traded and privately placed securities in the industrial, financial, and utility sectors. Residential mortgage-backed securities are structured securities that are collateralized by residential real estate loans and are primarily U.S. agency-backed. Our commercial mortgage-backed securities are structured securities that are collateralized by commercial real estate loans and are well diversified by geography, property type, expected maturities and vintage year. Our other asset-backed securities are structured securities that are primarily collateralized by consumer and corporate borrowings.
Our investment portfolio primarily consists of fixed maturity securities whose fair value is susceptible to market risk, including interest rate changes. See also “Quantitative and Qualitative Disclosures about Market Risk” included in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 2022 Annual Report on Form 10-K. Duration is a measurement used to quantify our inherent interest rate risk and analyze invested assets relative to our reserve liabilities.
The duration of our fixed maturity portfolio was as follows:
|
|
March 31, 2023 |
|
|
|
December 31, 2022 |
|
|
||||||||||||||||||
(dollars in millions) |
|
Amortized Cost, Net of Allowance for Credit Losses |
Fair Value |
|
|
% of Total |
|
|
|
Amortized Cost, Net of Allowance for Credit Losses |
Fair Value |
|
|
% of Total |
|
|
||||||||||
0-2 years |
|
$ |
1,773.9 |
|
|
$ |
1,739.7 |
|
|
|
22.7 |
|
% |
|
$ |
1,614.2 |
|
|
$ |
1,580.3 |
|
|
|
21.1 |
|
% |
2-4 years |
|
|
2,247.5 |
|
|
|
2,143.5 |
|
|
|
27.9 |
|
|
|
|
2,170.6 |
|
|
|
2,056.8 |
|
|
|
27.5 |
|
|
4-6 years |
|
|
2,075.6 |
|
|
|
1,906.1 |
|
|
|
24.8 |
|
|
|
|
2,044.2 |
|
|
|
1,850.6 |
|
|
|
24.8 |
|
|
6-8 years |
|
|
1,938.9 |
|
|
|
1,619.6 |
|
|
|
21.1 |
|
|
|
|
2,004.3 |
|
|
|
1,638.7 |
|
|
|
21.9 |
|
|
8-10 years |
|
|
217.3 |
|
|
|
174.8 |
|
|
|
2.3 |
|
|
|
|
339.5 |
|
|
|
263.6 |
|
|
|
3.5 |
|
|
10+ years |
|
|
120.0 |
|
|
|
94.5 |
|
|
|
1.2 |
|
|
|
|
121.7 |
|
|
|
91.8 |
|
|
|
1.2 |
|
|
Total fixed maturities |
$ |
8,373.2 |
|
|
$ |
7,678.2 |
|
|
|
100.0 |
|
% |
|
$ |
8,294.5 |
|
|
$ |
7,481.8 |
|
|
|
100.0 |
|
% |
|
Weighted average duration |
|
|
|
|
4.2 |
|
|
|
|
|
|
|
|
|
4.3 |
|
|
|
|
|
Our fixed maturity and equity securities are carried at fair value. Financial instruments, whose value was determined using significant management judgment or estimation, constituted less than 1% of the total assets we measured at fair value. See also Note 4 – “Fair Value” in the Notes to Interim Consolidated Financial Statements.
Limited partnerships and other investments consist primarily of our interest in corporate middle market and real estate limited partnerships. Corporate middle market limited partnerships may invest in senior or subordinated debt, preferred or common equity or a combination thereof, of privately-held middle market businesses. Real estate limited partnerships hold equity ownership positions in real properties and invest in debt secured by real properties. Our limited partnerships are generally accounted for under the equity method, or as a practical expedient using the fund’s net asset value, with financial information provided by the partnership on a two- or three-month lag.
Mortgage and other loans consist primarily of commercial mortgage loan participations, which represent our interest in commercial mortgage loans originated by a third-party. We share, on a pro-rata basis, in all related cash flows of the underlying mortgage loans, which are primarily investment-grade quality and diversified by geographic area and property type.
Equity securities primarily consist of U.S. income-oriented large capitalization common stocks and a broadly diversified U.S. equity index exchange-traded fund.
Although we expect to invest new funds primarily in investment-grade fixed maturities, we have invested, and expect to continue to invest, a portion of funds in below investment-grade fixed maturities, limited partnerships, common equity securities and other investment assets.
Impairments
For the three months ended March 31, 2023, we recognized net impairments of $14.8 million, consisting of losses of $10.7 million on fixed maturity securities, primarily related to intent to sell securities in the banking sector, and $4.1 million of estimated credit losses on mortgage loans. For the three months ended March 31, 2022, we recognized net impairments of $0.9 million.
At March 31, 2023 and December 31, 2022, the allowance for credit losses on mortgage loans was $7.2 million and $3.2 million, respectively, and the allowance for credit losses on available-for-sale debt securities was $2.4 million and $2.1 million, respectively.
The carrying value of fixed maturity securities on non-accrual status at March 31, 2023 was $14.8 million. There were no fixed maturity securities on non-accrual status at December 31, 2022 or March 31, 2022. The effects on income of non-accruals for the three months ended March 31, 2023, compared with amounts that would have been recognized in accordance with the original terms of the fixed maturities, were not material. There was no effect on income for the three months ended March 31, 2022. Any defaults in the fixed maturities portfolio in future periods may negatively affect investment income.
32
Unrealized Losses
Gross unrealized losses on fixed maturities at March 31, 2023 were $707.1 million, a decrease of $110.6 million compared to December 31, 2022, primarily attributable to lower prevailing interest rates, partially offset by wider credit spreads. At March 31, 2023, gross unrealized losses consisted primarily of $288.7 million on corporate fixed maturities, $134.4 million on municipals, $126.2 million on residential mortgage-backed securities, $83.4 million on commercial mortgage-backed securities and $51.9 million on U.S. government securities. See Note 3 – “Investments” in the Notes to Interim Consolidated Financial Statements.
We view gross unrealized losses on fixed maturities as non-credit related since it is our assessment that these securities will recover, allowing us to realize their anticipated long-term economic value. Further, we do not intend to sell, nor is it more likely than not we will be required to sell, such debt securities before this expected recovery of amortized cost (See also “Liquidity and Capital Resources”). Inherent in our assessment are the risks that market factors may differ from our expectations; we may decide to subsequently sell a security for unforeseen business needs or an economic purpose; or changes in the credit assessment from our original assessment may lead us to determine that a sale at the current value would maximize recovery on such investments. To the extent that there are such adverse changes, an impairment would be recognized as a realized loss. Although unrealized losses on fixed maturities are not reflected in the results of financial operations until they are realized, the fair value of the underlying investment, which does reflect the unrealized loss, is reflected in our Consolidated Balance Sheets.
The following table sets forth gross unrealized losses for fixed maturities by maturity period at March 31, 2023 and December 31, 2022. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties, or we may have the right to put or sell the obligations back to the issuers.
|
|
March 31, |
|
|
December 31, |
|
||
(in millions) |
|
2023 |
|
|
2022 |
|
||
Due in one year or less |
|
$ |
3.7 |
|
|
$ |
2.4 |
|
Due after one year through five years |
|
|
101.6 |
|
|
|
108.9 |
|
Due after five years through ten years |
|
|
312.9 |
|
|
|
382.0 |
|
Due after ten years |
|
|
56.8 |
|
|
|
67.6 |
|
|
|
|
475.0 |
|
|
|
560.9 |
|
Mortgage-backed and other asset-backed securities |
|
|
232.1 |
|
|
|
256.8 |
|
Total fixed maturities |
|
$ |
707.1 |
|
|
$ |
817.7 |
|
Our investment portfolio and shareholders’ equity can be significantly impacted by changes in market values of our securities. Market volatility could increase and defaults on fixed income securities could occur. As a result, we could incur additional realized and unrealized losses in future periods, which could have a material adverse impact on our results of operations and/or financial position.
Financial markets experienced significant volatility in the quarter as the regional banking sector came under pressure following the default of three banks. Subsequent tightening of lending standards may result in tighter credit conditions for households and businesses, the extent of which is uncertain. Also, during the quarter the Federal Reserve (the “Fed”) increased the federal funds rate by 0.50% to a target range of 4.75% to 5.00% and indicated it will consider additional hikes in the future to return inflation to the Fed’s two percent stated target. Tighter financial conditions are increasing the probability of an economic slowdown, and may increase the likelihood of defaults on our fixed income securities, particularly with respect to non-investment grade debt securities. Although we perform rigorous credit analysis of our fixed income investments, it is difficult to foresee which issuers, industries or markets will be most affected. As a result, the value of our fixed maturity portfolio could change rapidly in ways we cannot currently anticipate, and we could incur additional realized and unrealized losses in future periods.
33
Other Items
Net income (loss) also included the following items:
|
|
Three Months Ended March 31, |
|
|||||||||||||||||||||
(in millions) |
|
Core Commercial |
|
|
Specialty |
|
|
Personal |
|
|
Other |
|
|
Discontinued Operations |
|
|
Total |
|
||||||
2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net realized and unrealized investment losses |
|
$ |
(10.4 |
) |
|
$ |
(4.9 |
) |
|
$ |
(6.5 |
) |
|
$ |
(1.2 |
) |
|
$ |
— |
|
|
$ |
(23.0 |
) |
Other non-operating |
|
|
— |
|
|
|
— |
|
|
|
0.2 |
|
|
|
0.6 |
|
|
|
— |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net realized and unrealized investment gains (losses) |
|
$ |
(7.6 |
) |
|
$ |
(3.5 |
) |
|
$ |
(4.9 |
) |
|
$ |
0.1 |
|
|
$ |
— |
|
|
$ |
(15.9 |
) |
Discontinued life businesses |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.4 |
) |
|
|
(0.4 |
) |
We manage investment assets for our Core Commercial, Specialty, Personal Lines and Other segments based on the requirements of our combined property and casualty insurance companies. We allocate the investment income, expenses and realized gains and losses to our Core Commercial, Specialty, Personal Lines and Other segments based on actuarial and other information related to the underlying businesses.
Net realized and unrealized investment losses were $23.0 million for the three months ended March 31, 2023, compared to $15.9 million for the three months ended March 31, 2022. For the three months ended March 31, 2023, net realized and unrealized investment losses were primarily due to impairment losses on investments, including $10.3 million of losses related to intent to sell securities and $4.5 million of credit-related impairments. Additionally, for the three months ended March 31, 2023, we recognized net realized and unrealized investment losses of $7.1 million due to changes in the fair value of equity securities. For the three months ended March 31, 2022, net realized and unrealized investment losses were primarily due to changes in the fair value of equity securities.
Discontinued operations include our former accident and health and life businesses. Losses of $0.4 million for the three months ended March 31, 2022 primarily reflect adverse loss trends related to the long-term care pool.
Income Taxes
We file a consolidated U.S. federal income tax return that includes our holding company and its domestic subsidiaries (including non-insurance operations).
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
The provision for income taxes from continuing operations was a benefit of $5.5 million compared to an expense of $24.7 million for the three months ended March 31, 2023 and 2022, respectively. These amounts resulted in consolidated effective tax rates on pre-tax income (loss) of 31.4% and 19.0% for the three months ended March 31, 2023 and 2022, respectively. These provisions include excess tax benefits related to stock-based compensation of $1.0 million and $2.8 million for the three months ended March 31, 2023 and 2022, respectively. In addition, the provision for 2023 reflects benefits related to tax planning strategies implemented in prior years of $0.8 million. Absent these items, the provision for income taxes would have been a benefit of $3.7 million, or 21.1% and an expense of $27.5 million, or 21.2%, for the three months ended March 31, 2023 and 2022, respectively.
The income tax provision on operating income was an expense of $0.1 million and $28.2 million for the three months ended March 31, 2023 and 2022, respectively. These provisions resulted in effective tax rates for operating income of 2.1% and 19.3% for the three months ended March 31, 2023 and 2022, respectively. These provisions reflect the aforementioned excess tax benefits related to stock-based compensation of $1.0 million and $2.8 million for the three months ended March 31, 2023 and 2022, respectively. Absent this item, the provisions for income taxes would have been an expense of $1.1 million, or 23.4%, and $31.0 million, or 21.2%, for the three months ended March 31, 2023 and 2022, respectively.
Critical Accounting Estimates
Interim consolidated financial statements have been prepared in conformity with U.S. GAAP and include certain accounting policies that we consider to be critical due to the amount of judgment and uncertainty inherent in the application of those policies. While we believe that the amounts included in our consolidated financial statements reflect our best judgment, the use of different assumptions could produce materially different accounting estimates. As disclosed in our 2022 Annual Report on Form 10-K, we believe the following accounting estimates are critical to our operations and require the most subjective and complex judgment:
For a more detailed discussion of these critical accounting estimates, see our 2022 Annual Report on Form 10-K.
34
Statutory Surplus of Insurance Subsidiaries
The following table reflects statutory surplus for our insurance subsidiaries:
|
|
March 31, |
|
|
December 31, |
|
||
(in millions) |
|
2023 |
|
|
2022 |
|
||
Total Statutory Capital and Surplus |
|
$ |
2,674.5 |
|
|
$ |
2,690.4 |
|
The statutory capital and surplus for our insurance subsidiaries decreased $15.9 million during the first three months of 2023. This decrease was primarily driven by the change in non-admitted assets and from realized investment losses, partially offset by operating profits and from an increase in admitted deferred tax assets.
The NAIC prescribes an annual calculation regarding risk-based capital (“RBC”). RBC ratios for regulatory purposes are expressed as a percentage of the capital required to be above the Authorized Control Level (the “Regulatory Scale”); however, in the insurance industry, RBC ratios are widely expressed as a percentage of the Company Action Level. The following table reflects the Company Action Level, the Authorized Control Level and RBC ratios for Hanover Insurance (which includes Citizens and other insurance subsidiaries), as of March 31, 2023, expressed both on the Industry Scale (Total Adjusted Capital divided by the Company Action Level) and Regulatory Scale (Total Adjusted Capital divided by Authorized Control Level):
(dollars in millions) |
|
Company |
|
|
Authorized |
|
|
RBC Ratio |
|
|
RBC Ratio |
|
||||
The Hanover Insurance Company |
|
$ |
1,303.9 |
|
|
$ |
652.0 |
|
|
|
204 |
% |
|
|
409 |
% |
Liquidity and Capital Resources
Liquidity is a measure of our ability to generate sufficient cash flows to meet the cash requirements of business operations. As a holding company, our primary ongoing source of cash is dividends from our insurance subsidiaries. However, dividend payments to us by our insurance subsidiaries are subject to limitations imposed by regulators, such as prior notice periods and the requirement that dividends in excess of a specified percentage of statutory surplus or prior years’ statutory earnings receive prior approval (so called “extraordinary dividends”). During the first three months of 2023, Hanover Insurance did not provide dividends to the holding company.
Sources of cash for our insurance subsidiaries primarily consist of premiums collected, investment income and maturing investments. Primary cash outflows are payments for losses and loss adjustment expenses, policy and contract acquisition expenses, other underwriting expenses, and investment purchases. Cash outflows related to losses and loss adjustment expenses can be variable because of uncertainties surrounding settlement dates for liabilities for unpaid losses and because of the potential for large losses either individually or in the aggregate. We periodically adjust our investment policy to respond to changes in short-term and long-term cash requirements.
Net cash provided by operating activities was $18.1 million during the first three months of 2023, as compared to $200.1 million during the first three months of 2022, a decrease of $182.0 million. During the first quarter of 2022, $183.3 million of surplus funds were received from the MCCA, of which $34.4 million were remitted to policyholders during that same quarter. There was no such refund from the MCCA during 2023. Additionally, the decrease in cash provided was due to an increase in loss and LAE payments, primarily related to catastrophe losses, partially offset by an increase in premiums.
Net cash used in investing activities was $106.5 million during the first three months of 2023, as compared to $112.2 million during the first three months of 2022. During the first three months of 2023 and 2022, cash used in investing activities primarily related to net purchases of fixed maturities.
Net cash used in financing activities was $35.1 million during the first three months of 2023, as compared to $46.8 million during the first three months of 2022. During the first three months of 2023, cash used in financing activities primarily resulted from a quarterly dividend payment to our shareholders. During the first three months of 2022, cash used in financing activities primarily resulted from a quarterly dividend payment to our shareholders and, to a lesser extent, repurchases of our common stock.
Dividends to common shareholders are subject to quarterly board approval and declaration. During the first three months of 2023, we paid a quarterly dividend of $0.81 per share to our shareholders totaling $28.9 million. We believe that our holding company assets are sufficient to provide for future shareholder dividends should the Board of Directors declare them.
At March 31, 2023, THG, as a holding company, held approximately $299.2 million of fixed maturities and cash. We believe our holding company assets will be sufficient to meet our short-term obligations, which we expect to consist primarily of quarterly dividends to our shareholders (as and to the extent declared), interest on our senior and subordinated debentures, certain costs associated with benefits due to our former life employees and agents and, to the extent required, payments related to indemnification of liabilities associated with the sale of various subsidiaries. As discussed below, we have, and opportunistically may continue to, repurchase our common stock and debt. We do not expect that it will be necessary to dividend additional funds from our insurance subsidiaries in order to fund current year holding company obligations; however, we may decide to do so.
35
We expect to continue to generate sufficient positive operating cash to meet all short-term and long-term cash requirements relating to current operations, including the funding of our qualified defined benefit pension plan. We believe that this plan is fully funded. The ultimate payment amounts for our benefit plan is based on several assumptions, including but not limited to, the rate of return on plan assets, the discount rate for benefit obligations, mortality experience, interest crediting rates, inflation and the ultimate valuation and determination of benefit obligations. Since differences between actual plan experience and our assumptions are almost certain, changes, both positive and negative, to our current funding status and ultimately our obligations in future periods are likely.
Our insurance subsidiaries maintain a high degree of liquidity within their respective investment portfolios in fixed maturity and short-term investments. During 2023, the financial markets continued to experience significant volatility and values of many securities currently held by THG and its subsidiaries remain in unrealized loss positions. We believe that the quality of the assets we hold will allow us to realize the long-term economic value of our portfolio, including the securities that are currently in an unrealized loss position. We do not anticipate the need to sell these securities to meet our insurance subsidiaries’ cash requirements since we expect our insurance subsidiaries to generate sufficient operating cash to meet all short-term and long-term cash requirements relating to current operations. However, there can be no assurance that unforeseen business needs or other items will not occur causing us to have to sell those securities in a loss position before their values fully recover, thereby causing us to recognize impairment charges in that time period.
The Board of Directors authorized a stock repurchase program which provides for aggregate repurchases of our common stock of up to $1.3 billion. Under the repurchase authorization, we may repurchase, from time to time, common stock in amounts, at prices and at such times as we deem appropriate, subject to market conditions and other considerations. Repurchases may be executed using open market purchases, privately negotiated transactions, accelerated repurchase programs, or other transactions. We are not required to purchase any specific number of shares or to make purchases by any certain date under this program. As of March 31, 2023, we had repurchased 7.9 million shares under this $1.3 billion program and had approximately $330 million available for additional repurchases.
We maintain our membership in the Federal Home Loan Bank (“FHLB”) to provide access to additional liquidity based on our holdings of FHLB stock and pledged collateral. At March 31, 2023, we had borrowing capacity of $117.2 million. There were no outstanding borrowings under this short-term facility at March 31, 2023; however, we have borrowed and may continue to borrow, from time to time, through this facility to provide short-term liquidity.
On April 30, 2019, we entered into a credit agreement that provides for a five-year unsecured revolving credit facility not to exceed $200.0 million at any one time outstanding, with the option to increase the facility up to $300.0 million (assuming no default and satisfaction of other specified conditions, including the receipt of additional lender commitments). The agreement also includes an uncommitted subfacility of $50.0 million for standby letters of credit. On March 24, 2023, we amended and restated the credit agreement to provide for the replacement of the interest rate benchmark, from London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (“SOFR”). Other material terms of the credit agreement remained unchanged. Borrowings, if any, under this agreement are unsecured and incur interest at a rate per annum equal to, at our election, either (i) the greatest of, (a) the prime commercial lending rate of the administrative agent, (b) the NYFRB Rate plus half a percent, or (c) the one month Adjusted Term SOFR Rate plus one percent; each subject to a margin that ranges from 0.25% to 0.625% depending on our debt rating, or (ii) Adjusted SOFR Rate for the applicable interest period, plus a margin that ranges from 1.25% to 1.625% depending on our debt rating. The agreement also contains certain financial covenants such as maintenance of specified levels of consolidated equity and leverage ratios, and requires that certain of our subsidiaries maintain minimum RBC ratios. We currently have no borrowings under this agreement and had no borrowings under this agreement during the first three months of 2023.
At March 31, 2023, we were in compliance with the covenants of our debt and credit agreements.
Contingencies and Regulatory Matters
REGULATORY AND INDUSTRY DEVELOPMENTS
In response to the Pandemic, regulators in many of the states in which we operate issued orders or guidance pertaining to, among other things, (a) premium refunds, credits or reductions for personal automobile insurance premiums and premiums for other insurance lines that regulators determined were disproportionately impacted by the Pandemic, including certain commercial lines, for the periods during which governmental restrictions were or remain in effect, with premium adjustments based on factors such as the ongoing frequency and severity of claims, inflation, repair costs and reinsurance pricing, among others; (b) premium payment grace periods, moratoriums on policy non-renewals and cancellations, and other measures that are similar to actions historically implemented in regions heavily impacted by catastrophes; and (c) a reassessment of rates in light of exposures, loss experience and economic conditions. Regulatory restrictions on rate changes, underwriting, policy terms, and the ability to non-renew business may, depending on their duration, limit THG’s ability to manage our mix of business and any potential exposures that emerge in our lines of business in the near term.
Though legislative efforts to create government-funded pandemic insurance programs or other insurance-based pandemic relief have substantially moderated, policymakers continue to discuss various proposals in that area. It is premature to estimate the potential impact, if any, of those proposals on our business.
Information regarding litigation, legal contingencies and regulatory matters appears in Part I - Note 12 “Commitments and Contingencies” in the Notes to Interim Consolidated Financial Statements.
36
Risks and Forward-Looking Statements
Information regarding risk factors and forward-looking information appears in Part II – Item 1A of this Quarterly Report on Form 10-Q and in Part I – Item 1A of our 2022 Annual Report on Form 10-K. This Management’s Discussion and Analysis should be read and interpreted in light of such factors.
37
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Our market risks, the ways we manage them, and sensitivity to changes in interest rates, and equity price risk are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2022, included in our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes in the first three months of 2023 to these risks or our management of them.
ITEM 4
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures Evaluation
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our “disclosure controls and procedures,” as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Based on our controls evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) material information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate “internal control over financial reporting,” as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting, as required by Rule 13a-15(d) of the Exchange Act, to determine whether any changes occurred during the period covered by this quarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that there were no such changes during the quarter ended March 31, 2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
38
PART II – OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
The Company has been named a defendant in various legal proceedings arising in the normal course of business. In addition, the Company is involved, from time to time, in examinations, investigations and proceedings by governmental and self-regulatory agencies. The potential outcome of any such action or regulatory proceedings in which the Company has been named a defendant or the subject of an inquiry, examination or investigation, and its ultimate liability, if any, from such actions or regulatory proceedings, is difficult to predict at this time. The ultimate resolutions of such proceedings are not expected to have a material effect on the Company’s financial position, although they could have a material effect on the results of operations for a particular quarterly or annual period.
ITEM 1A – RISK FACTORS
This document contains, and management may make, certain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, may be forward-looking statements. When used in our Management’s Discussion and Analysis, words such as: “believes,” “anticipates,” “expects,” “projections,” “outlook,” “should,” “could,” “plan,” “guidance,” “likely,” “on track to,” “potential,” “continue,” “targeted,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. We caution readers that accuracy with respect to forward-looking projections is difficult and subject to risks and uncertainties. Those risks and uncertainties, in some cases, have affected, and in the future could affect, our actual results and could cause our actual results for the remainder of 2023 and beyond to differ materially from historical results and from those expressed in any of our forward-looking statements. We operate in a business environment that is continually changing, and as such, new risk factors may emerge over time. Additionally, our business is conducted in competitive markets and, therefore, involves a higher degree of risk. We cannot predict these new risk factors, nor can we assess the impact, if any, that they may have on our business in the future.
Some of the factors that could cause actual results to differ include, but are not limited to, the following:
39
In addition, historical and future reported financial results include estimates with respect to premiums written and earned, reinsurance recoverables, current accident year “picks,” loss and loss adjustment reserves and development, fair values of certain investments, other assets and liabilities, tax, contingent and other liabilities, and other items. These estimates are subject to change as more information becomes available.
Readers should not place undue reliance on forward-looking statements, which speak only as of the date they are made. We do not undertake any responsibility to update or revise our forward-looking statements, except as required by law.
For a more detailed discussion of our risks and uncertainties, see also Item 1A – Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022.
40
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
Shares purchased in the first quarter of 2023 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
Total Number of |
|
|
Approximate Dollar Value of |
|
||||
|
|
|
|
|
|
|
|
Shares Purchased as |
|
|
Shares That May Yet |
|
||||
|
|
|
|
|
|
|
|
Part of Publicly |
|
|
be Purchased Under the |
|
||||
|
|
Total Number of |
|
|
Average Price |
|
|
Announced Plans or |
|
|
Plans or Programs |
|
||||
Period |
|
Shares Purchased(1) |
|
|
Paid per Share |
|
|
Programs |
|
|
(in millions) |
|
||||
January 1 - 31, 2023 |
|
|
219 |
|
|
$ |
135.23 |
|
|
|
— |
|
|
$ |
330 |
|
February 1 - 28, 2023 |
|
|
61,262 |
|
|
|
139.50 |
|
|
|
— |
|
|
|
330 |
|
March 1 - 31, 2023 |
|
|
638 |
|
|
|
126.42 |
|
|
|
— |
|
|
|
330 |
|
Total |
|
|
62,119 |
|
|
$ |
139.36 |
|
|
|
— |
|
|
$ |
330 |
|
41
ITEM 6 – EXHIBITS
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
|
|
The Hanover Insurance Group, Inc. |
|
|
Registrant |
|
|
|
May 3, 2023 |
|
/s/ John C. Roche |
Date |
|
John C. Roche |
|
|
President, Chief Executive Officer and Director |
|
|
|
|
|
|
May 3, 2023 |
|
/s/ Jeffrey M. Farber |
Date |
|
Jeffrey M. Farber |
|
|
Executive Vice President and Chief Financial Officer |
43
Exhibit 10.1
THE HANOVER INSURANCE GROUP, INC.
RESTRICTED STOCK UNIT AGREEMENT
This Restricted Stock Unit Agreement (the “Agreement”) is effective as of <GRANT DATE> (the “Grant Date”) by and between The Hanover Insurance Group, Inc., a Delaware corporation (the “Company”), and <PARTICIPANT NAME> (“Participant” or “you”). Capitalized terms used without definition herein shall have the meanings set forth in The Hanover Insurance Group 2022 Long-Term Incentive Plan (as it may be amended from time to time, the “Plan”).
PREAMBLE
WHEREAS, pursuant and subject to the terms of the Plan and this Agreement, the Administrator has agreed to grant to Participant an Award of Restricted Stock Units (the “RSUs”).
NOW, THEREFORE, for and in consideration of the foregoing and the mutual covenants and promises hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
_________________________
1 Pursuant to Mr. Farber’s Offer Letter dated September 21, 2016, in the event he is involuntarily terminated by the company without cause, or terminates employment for “good reason,” he is entitled to one year’s additional vesting credit.
2
For the purpose of this Agreement, a termination of Employment shall be deemed to be a “Retirement” if all of the following conditions are satisfied: (i) Participant’s Employment terminates (other than for Cause), (ii) he or she is either (x) 65 years of age or older, as of the date of such termination, or (y) 60 years of age or older, as of the date of such termination and, immediately prior to such termination, Participant has been in continuous Employment for five or more years, and (iii)(1) Participant provides the Company not less than six months’ advanced written notice of Participant’s intent to retire (the “Notice Period”), and (2) Participant remains in continuous Employment and in good standing during such Notice Period and terminates Employment at the end of such Notice Period. The Company may, in its sole discretion waive, in whole or in part, the requirements of clause (iii) of the preceding sentence. In the event that Participant’s Employment is terminated for Cause during the Notice Period, the RSUs will be automatically cancelled and forfeited and shall be returned to the Company for no consideration.
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(a) Participant hereby acknowledges and agrees that in the event of any breach of Section 10 of this Agreement, the Company would be irreparably harmed and could not be made whole by monetary damages. Participant accordingly agrees to waive the defense in any action for injunctive relief or specific performance that a remedy at law would be adequate and that the Company, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to an injunction or to compel specific performance of Section 10 of this Agreement.
(b) In addition to any other remedy to which the Company may be entitled at law or in equity (including the remedy provided in the preceding paragraph), Participant hereby acknowledges and agrees that in the event of any breach of Section 10 of this Agreement, Participant shall be required to refund to the Company the value received by Participant upon vesting of the RSUs; provided, however, that the Company makes any such claim, in writing, against Participant alleging a violation of Section 10 of this Agreement not later than two years following Participant’s termination of Employment (three years in the event of a termination by reason of Retirement).
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The Company makes no representations to Participant with respect to the tax treatment of any amount paid or payable pursuant to this Award. This Award is intended to be interpreted and operated to the extent possible so that any such amounts shall be exempt from the requirements of Section 409A, or to the extent this Award is subject to Section 409A, in a manner that complies with Section 409A. To the extent any payment or benefit that would be provided hereunder constitutes “deferred compensation” under Section 409A of the Code and is contingent on a termination of the Participant’s employment, such payment or benefit will only be provided to the Participant if the Participant experiences a “separation from service” within the meaning of Section 409A (after giving effect to the presumptions contained therein). In no event shall THG be liable to Participant for or with respect to any taxes, penalties and/or interest which may be imposed upon any such amounts pursuant to Section 409A or any other federal or state tax law. To the extent that any payment or benefit should be subject to Section 409A (or any other federal or state tax law), Participant shall bear the entire risk of any such taxes, penalties and or interest.
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IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the Grant Date.
THE HANOVER INSURANCE GROUP, INC. |
By:________________________________ |
Name: Denise Lowsley |
Title: EVP &CHRO |
|
|
___________________________________ |
<PARTICIPANT NAME> |
Exhibit 10.2
THE HANOVER INSURANCE GROUP, INC.
PERFORMANCE-BASED RESTRICTED STOCK UNIT AGREEMENT
This Performance-Based Restricted Stock Unit Agreement (the “Agreement”) is effective as of <GRANT DATE> (the “Grant Date”) by and between The Hanover Insurance Group, Inc., a Delaware corporation (the “Company”), and <PARTICIPANT NAME> (“Participant” or “you”). Capitalized terms used without definition herein shall have the meanings set forth in The Hanover Insurance Group 2022 Long-Term Incentive Plan (as it may be amended from time to time, the “Plan”).
PREAMBLE
WHEREAS, pursuant and subject to the terms of the Plan and this Agreement, the Administrator has agreed to grant to Participant performance-based Restricted Stock Units (the “PBRSUs”); and
WHEREAS, the PBRSUs will be subject to certain restrictions, the attainment of certain performance criteria and other terms and conditions as set forth in this Agreement.
NOW, THEREFORE, for and in consideration of the foregoing and the mutual covenants and promises hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
Unless earlier terminated, forfeited, relinquished or expired, the PBRSUs will vest on the third anniversary of the Grant Date (the “Vesting Date”); provided:
i) The Company achieves the corporate goals set forth on Schedule A (the “Corporate Goals”) by the date set forth on Schedule A (the “Goal Completion Date”). The actual number of PBRSUs that shall be earned and that shall vest, if any, shall be determined in accordance with the terms set forth on Schedule A; and
ii) Participant remains continuously an Employee of the Company or any of its Affiliates (the Company and its Affiliates hereinafter referred to as “THG”) throughout the period from the Grant Date to the Vesting Date except as provided in Sections 4, 5, 6 and 7 below.
The determination of (i) whether and to the extent the Corporate Goals set forth on Schedule A have been achieved, and (ii) any adjustment to the actual number of PBRSUs that are earned and vested, shall be in the sole and absolute discretion of the Administrator. All decisions by the Administrator shall be final and binding upon Participant. In the event the Vesting Date falls on a day that is not a business day (i.e., a weekend day or holiday on which banks are not generally open in the Commonwealth of Massachusetts), the Vesting Date shall be the next following day that is a business day.
_____________________________
1 Pursuant to Mr. Farber’s Offer Letter dated September 21, 2016, in the event he is involuntarily terminated by the company without cause, or terminates employment for “good reason,” he is entitled to one year’s additional vesting credit.
2
If Participant ceases to receive benefits under the Company’s Long-Term Disability Program prior to becoming Disabled and immediately returns to active Employment, the PBRSUs will continue to vest in accordance with Section 2 of this Agreement.
(a) Except as provided below in Section 6(c), upon consummation of a Change in Control, to the extent the PBRSUs are outstanding and unvested immediately prior to the Change in Control, Participant shall automatically vest in such number of PBRSUs as determined in Section 6(b) as of immediately prior to such Change in Control.
(b) The number of PBRSUs that shall vest pursuant to Section 6(a) above, if any, shall be determined in accordance with the level of achievement of the Corporate Goals as set forth on Schedule A.
(c) Notwithstanding Section 6(a) above, no acceleration of vesting shall occur with respect to the PBRSUs if the Administrator reasonably determines in good faith prior to the occurrence of a Change in Control that this Award of PBRSUs shall be honored or assumed, or new rights substituted therefor (such honored, assumed or substituted award hereinafter called an “Alternative Award”), by Participant's employer (or the parent or a subsidiary of such employer) immediately following the Change in Control, provided that the Alternative Award shall be a time-based restricted stock unit award with respect to that number of units determined as set forth under Section 6(b) above that is no longer subject to any performance-based vesting requirement, and shall also:
(i) be based on stock which is traded, or will be traded upon consummation of the Change in Control, on an established securities market;
(ii) provide Participant (or each Participant in a class of Participants) with rights and entitlements substantially equivalent to or better than the rights, terms and conditions applicable under this Award, including, but not limited to, an identical or better time-based vesting schedule and accelerated vesting provisions;
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(iii) have substantially equivalent economic value to this Award (determined at the time of the Change in Control and based upon the number of Shares Participant would have received had the Award been accelerated pursuant to Section 6(a) above); and
(iv) have terms and conditions which provide that in the event that Participant's employment is involuntarily terminated (other than for Cause) or Participant terminates employment for “Good Reason” (as defined below), in either case, prior to the Vesting Date, Participant shall automatically vest in 100% of the Alternative Award and any conditions on Participant's rights under, or any restrictions on transfer or exercisability applicable to, such Alternative Award shall be waived or shall lapse in full.
For this purpose, “Good Reason” shall mean the occurrence of one or more of the events listed below following a Change in Control:
(x) if Participant is a “Participant” (as that term is defined in the CIC Plan) in the Company’s Amended and Restated Employment Continuity Plan or its successor plan (the “CIC Plan”), the occurrence of any of the events enumerated under the definition of “Good Reason” applicable to Participant’s “Tier” level as set forth in the CIC Plan; or
(y) if Participant is not a “Participant” in the CIC Plan, the occurrence of any of the following (A) a reduction in Participant’s rate of annual base salary as in effect immediately prior to such Change in Control; (B) a reduction in Participant’s annual short-term incentive compensation plan target award opportunity (but excluding the conversion of any cash incentive arrangement into an equity incentive arrangement of commensurate value or vice versa) from that which was in effect immediately prior to such Change in Control; or (C) any requirement that you relocate to an office more than 35 miles from the facility where Participant was located immediately prior to the Change in Control.
(d) In the event a Participant believes that a “Good Reason” event has been triggered, Participant must give the Company (or Participant’s employer, if not the Company) written notice within 30 days of the first occurrence of such triggering event and a proposed termination date which shall be not sooner than 60 days nor later than 90 days after the date of such notice. Such notice shall specify Participant’s basis for determining that “Good Reason” has been triggered. The Company (or Participant’s employer, if applicable) shall have the right to cure a purported “Good Reason” within 30 days of receipt of said notice and, if so cured, a termination of Participant’s Employment shall not be considered to be for “Good Reason” as a result of such event. If the event triggering “Good Reason” is not cured by the Company (or Participant’s employer, if applicable) within 30 days of its receipt of such notice, Participant shall be required to terminate his/her Employment on the proposed termination date in order to have his/her termination of Employment treated as a “Good Reason” termination hereunder.
(e) Notwithstanding Sections 6(a) and 6(c) above, in the event of a Change in Control, the Administrator may elect, in its sole discretion, exercised prior to the effective date of the Change in Control, to accelerate the vesting of all or any portion of the PBRSUs.
(f) Upon vesting under Section 6 any remaining unvested PBRSUs shall be automatically cancelled and forfeited and returned to the Company for no consideration.
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For the purpose of this Agreement, a termination of Employment shall be deemed to be a “Retirement” if all of the following conditions are satisfied: (i) Participant’s Employment terminates (other than for Cause), (ii) he or she is either (x) 65 years of age or older, as of the date of such termination, or (y) 60 years of age or older, as of the date of such termination and, immediately prior to such termination, Participant has been in continuous Employment for five or more years, and (iii)(1) Participant provides the Company not less than six months’ advanced written notice of Participant’s intent to retire (the “Notice Period”), and (2) Participant remains in continuous Employment and in good standing during such Notice Period and terminates Employment at the end of such Notice Period. The Company may, in its sole discretion waive, in whole or in part, the requirements of clause (iii) of the preceding sentence. In the event that Participant’s Employment is terminated for Cause during the Notice Period, the PBRSUs will be automatically cancelled and forfeited and shall be returned to the Company for no consideration.
Notwithstanding the foregoing, in the event a Change in Control occurs prior to Participant’s termination of Employment as a result of his or her Retirement, effective immediately upon the occurrence of such Change in Control, the terms of this Section 7 will be void and shall immediately terminate and be of no further force and effect.
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(a) Participant hereby acknowledges and agrees that in the event of any breach of Section 11 of this Agreement, the Company would be irreparably harmed and could not be made whole by monetary damages. Participant accordingly agrees to waive the defense in any action for injunctive relief or specific performance that a remedy at law would be adequate and that the Company, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to an injunction or to compel specific performance of Section 11 of this Agreement.
(b) In addition to any other remedy to which the Company may be entitled at law or in equity (including the remedy provided in the preceding paragraph), Participant hereby acknowledges and agrees that in the event of any breach of Section 11 of this Agreement, Participant shall be required to refund to the Company the value received by Participant upon vesting of the PBRSUs; provided, however, that the Company makes any such claim, in writing, against Participant alleging a violation of Section 11 of this Agreement not later than two years following Participant’s termination of Employment (three years in the event of a termination by reason of Retirement).
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The Company makes no representations to Participant with respect to the tax treatment of any amount paid or payable pursuant to this Award. While this Award is intended to be interpreted and operated to the extent possible so that any such amounts shall be exempt from the requirements of Section 409A, in no event shall THG be liable to Participant for or with respect to any taxes, penalties and/or interest which may be imposed upon any such amounts pursuant to Section 409A or any other federal or state tax law. To the extent that any such amount should be subject to Section 409A (or any other federal or state tax law), Participant shall bear the entire risk of any such taxes, penalties and or interest.
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IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the Grant Date.
THE HANOVER INSURANCE GROUP, INC. |
By:________________________________ |
Name: Denise Lowsley |
Title: Executive Vice President and CHRO |
|
|
___________________________________ |
<PARTICIPANT NAME> |
Exhibit 10.3
THE HANOVER INSURANCE GROUP, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
This Non-Qualified Stock Option Agreement (the “Agreement”) is effective as of <GRANT DATE> (the “Grant Date”), by and between The Hanover Insurance Group, Inc., a Delaware corporation (the “Company”), and <PARTICIPANT NAME> (“Participant” or “you”). Capitalized terms used without definition herein shall have the meanings set forth in The Hanover Insurance Group 2022 Long-Term Incentive Plan (as it may be amended from time to time, the “Plan”).
PREAMBLE
WHEREAS, the Company considers it desirable and in the best interests of the Company that Participant be given an opportunity to acquire a proprietary interest in the Company in the form of an option to purchase shares of Stock.
NOW, THEREFORE, for and in consideration of the foregoing and the mutual covenants and promises hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
On the first two vesting dates set forth above, to the extent the Stock Option would otherwise become vested and exercisable with respect to a fractional Share, such fractional Share shall not vest and the number of Shares becoming vested and exercisable on such vesting date shall be rounded down so that the Stock Option is only exercisable with respect to a whole number of Shares. In the event the vesting date falls on a day that is not a business day (i.e., a weekend day or holiday on which banks are not generally open in the Commonwealth of Massachusetts), the vesting date shall be the next following day that is a business day.
_____________________________
1 Pursuant to Mr. Farber’s Offer Letter dated September 21, 2016, in the event he is involuntarily terminated by the company without cause, or terminates employment for “good reason,” he is entitled to one year’s additional vesting credit.
2
(a) Termination for Cause. If Participant's Employment is terminated for Cause or occurs in circumstances that in the sole discretion of the Administrator would have constituted grounds for Participant’s Employment to be terminated for Cause, effective immediately prior to such termination, the Stock Option, whether or not vested, shall be automatically cancelled and forfeited and shall be returned to the Company for no consideration.
(b) Voluntary Termination. Except as set forth in Section 4(f) below, if Participant voluntarily terminates his/her Employment, effective immediately prior to such termination, any portion of the Stock Option that is not then vested shall be automatically cancelled and forfeited and shall be returned to the Company for no consideration, and such portion of the Stock Option that is then vested and exercisable shall remain exercisable until the earlier of (i) the last day of the three (3) month period following the date of such termination, or (ii) the Expiration Date.
(c) Disability. If Participant is Disabled prior to the date this Stock Option becomes fully vested and exercisable pursuant to Section 3 of this Agreement, this Stock Option, to the extent then outstanding and unvested, shall automatically vest in full and become exercisable on the date Participant is Disabled. To the extent all or any portion of this Stock Option is outstanding and exercisable on the date Participant is Disabled (determined after giving effect to the preceding sentence), the Stock Option (or portion thereof) shall remain exercisable until the earlier of (x) the last day of the one (1) year period following the date Participant is Disabled, or (y) the Expiration Date. For purposes of this subsection, Participant shall be “Disabled” if he or she has been unable, for a period of twelve consecutive months, to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment and has been receiving income replacement benefits for a period of twelve consecutive months under the Company’s Long-Term Disability Program. The date that Participant is Disabled for purposes of this Agreement is the twelve-month anniversary of the date Participant commences receiving such benefits under the Company’s Long-Term Disability Program.
If Participant ceases to receive benefits under the Company’s Long-Term Disability Program prior to becoming Disabled and immediately thereafter returns to active Employment, the Stock Option will continue to vest in accordance with Section 3 of this Agreement.
(d) Death. If Participant’s Employment is terminated due to his or her death prior to the date this Stock Option becomes fully vested and exercisable pursuant to Section 3 of this Agreement, this Stock Option, to the extent then outstanding and unvested, shall automatically vest in full and become exercisable on the date of Participant’s death. To the extent all or any portion of the Stock Option is outstanding and exercisable on the date Participant dies (determined after giving effect to the preceding sentence), the Stock Option (or portion thereof) shall remain exercisable until the earlier of (x) last day of the one (1) year period following the date Participant is terminated due to death, or (y) the Expiration Date.
(e) Covered Transaction/Change in Control. In the event of a Covered Transaction (other than a Change in Control, whether or not it is a Covered Transaction), the Administrator shall, with respect to the Stock Option, take one of the actions set forth in Sections 7(a)(1), 7(a)(2) or 7(a)(3) of the Plan. Notwithstanding the terms of the Plan, in the event of a Change in Control (whether or not it is a Covered Transaction), the following rules shall apply:
(i) Except as provided below in Section 4(e)(ii), in the event of a Change in Control, to the extent the Stock Option is outstanding and unvested immediately prior to the Change in Control, the Stock Option shall automatically vest in full as of immediately prior to such Change in Control.
(ii) Notwithstanding Section 4(e)(i) above, no acceleration of vesting shall occur with respect to the Stock Option if the Administrator reasonably determines in good faith prior to the occurrence of the Change in Control that this Award shall be honored or assumed, or new rights substituted therefor (such honored, assumed or substituted award hereinafter called an “Alternative Award”), by Participant's employer (or the parent or a subsidiary of such employer) immediately following the Change in Control, provided that any such Alternative Award must:
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(A) be based on stock which is traded, or will be traded upon consummation of the Change in Control, on an established securities market;
(B) provide Participant (or each Participant in a class of Participants) with rights and entitlements substantially equivalent to or better than the rights, terms and conditions applicable under this Award, including, but not limited to, an identical or better vesting schedule and accelerated vesting provisions;
(C) have substantially equivalent economic value to this Award (determined at the time of the Change in Control); and
(D) have terms and conditions which provide that in the event that Participant's employment is involuntarily terminated (other than for Cause) or Participant terminates employment for “Good Reason” (as defined below), in either case, prior to the third anniversary of the Grant Date, Participant shall automatically vest in 100% of the Alternative Award and any conditions on Participant’s rights under, or any restrictions on transfer or exercisability applicable to, such Alternative Award shall be waived or shall lapse in full.
For this purpose, “Good Reason” shall mean the occurrence of one or more of the events listed below following a Change in Control:
(X) if Participant is a “Participant” (as that term is defined in the CIC Plan) in the Company’s Amended and Restated Employment Continuity Plan or its successor plan (the “CIC Plan”), the occurrence of any of the events enumerated under the definition of “Good Reason” applicable to Participant’s “Tier” Level as set forth in CIC Plan; or
(Y) if Participant is not a “Participant” in the CIC Plan, the occurrence of any of the following (A) a reduction in your rate of annual base salary as in effect immediately prior to such Change in Control; (B) a reduction in your annual short-term incentive compensation plan target award opportunity (but excluding the conversion of any cash incentive arrangement into an equity incentive arrangement of commensurate value or vice versa) from that which was in effect immediately prior to such Change in Control; or (C) any requirement that you relocate to an office more than 35 miles from the facility where you were located immediately prior to the Change in Control.
(iii) In the event Participant believes a “Good Reason” event has been triggered, Participant must give the Company (or Participant’s employer, if not the Company) written notice within 30 days of the first occurrence of such triggering event and a proposed termination date which shall not be sooner than 60 days nor longer than 90 days after the date of such notice. Such notice shall specify Participant’s basis for determining that “Good Reason” has been triggered. The Company (or Participant’s employer, if applicable) shall have the right to cure a purported “Good Reason” within 30 days of receipt of said notice and, if so cured, a termination of Participant’s Employment shall not be considered to be for “Good Reason” as a result of such event. If the event triggering “Good Reason” is not cured by the Company (or Participant’s employer, if applicable) within 30 days of its receipt of such notice, Participant shall be required to terminate his/her Employment on the proposed termination date in order to have his/her termination of Employment be treated as a “Good Reason” termination hereunder.
(iv) Notwithstanding Sections 4(e)(i) and 4(e)(ii) above, the Administrator may elect, in its sole discretion at a time prior to the effective date of the Change in Control, to accelerate all or any portion of the Stock Option.
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(f) Retirement. If Participant’s Employment terminates as a result of his/her Retirement, and such termination occurs on or after the December 1st immediately following the Grant Date, this Stock Option shall remain outstanding and shall continue to become exercisable in accordance with the vesting schedule set forth in Section 3 as if Participant remained in Employment on each applicable vesting date and, to the extent vested and exercisable, the Stock Option shall remain exercisable by the Participant until the Expiration Date.
For the purpose of this Agreement, a termination of Employment shall be deemed to be a “Retirement” if all of the following conditions are satisfied: (i) Participant’s Employment terminates (other than for Cause), (ii) he or she is either (x) 65 years of age or older, as of the date of such termination, or (y) 60 years of age or older, as of the date of such termination and, immediately prior to such termination, Participant has been in continuous Employment for five or more years, and (iii)(1) Participant provides the Company not less than six months’ advanced written notice of Participant’s intent to retire (the “Notice Period”), and (2) Participant remains in continuous Employment and in good standing during such Notice Period and terminates Employment at the end of such Notice Period. The Company may, in its sole discretion waive, in whole or in part, the requirements of clause (iii) of the preceding sentence. In the event that Participant’s Employment is terminated for Cause during the Notice Period the Stock Option will be automatically cancelled and forfeited and shall be returned to the Company for no consideration.
(g) Involuntary Termination. If Participant’s Employment is terminated (other than as a result of the events set forth above in this Section 4), effective immediately prior to such termination, any portion of the Stock Option that is not then vested shall be automatically cancelled and forfeited and shall be returned to the Company for no consideration, and such portion of the Stock Option that is then vested and exercisable shall remain exercisable until the earlier of (i) the last day of three (3) month period following the date of termination, or (ii) the Expiration Date.
Exercise notices hereunder shall be in such form as is acceptable to the Administrator, including by electronic notice with electronic signature. If notice is provided by a person other than Participant, this Stock Option will not be deemed to have been exercised until the Administrator has received such evidence as it may require that the person exercising the Stock Option has the right to do so. Unless otherwise determined by the Administrator, such notices, and any other notices hereunder, must be in writing and, if to the Company, shall be delivered personally to the Human Resources Department or such other party as designated by the Company or mailed to its principal office and, if to Participant, shall be delivered personally or mailed to Participant at his or her address on the records of the Company.
Payment of the Option Price may be made in (a) shares of Stock (including through a “net exercise” (as set forth in subsection (b)), (b) by a “net exercise” arrangement pursuant to which the Company will reduce the number of shares of Stock that would otherwise be issued upon exercise of the Stock Option by a number of whole shares having a fair market value equal to the aggregate Option Price of the Stock Option, (c) cash or a combination of shares of Stock and cash, or (d) through a broker-assisted exercise program acceptable to the Administrator.
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To the extent that the Option Price of this Stock Option is less than the fair market value of a share of Stock by $0.50 or more on the date described below (determined by using the closing price of a share of Stock on such date, or if the Stock is not traded on such date, the most recent date on which the Stock was traded), this Stock Option, to the extent then outstanding and vested, will be automatically exercised, without any action required on behalf of Participant, by a “net exercise” as described in clause (b) of the paragraph above, on (x) the Expiration Date, if Participant has remained continuously Employed from the Grant Date through the Expiration Date, or (y) the last day of the applicable post-termination of Employment exercise period of this Stock Option as set forth in Section 4 above, if the Employment of Participant was involuntarily terminated by the Company for reasons other than for Cause, was terminated by reason of death, being Disabled or Retirement, or was voluntarily terminated by Participant.
(a) Participant hereby acknowledges and agrees that in the event of any breach of Section 7 of this Agreement, the Company would be irreparably harmed and could not be made whole by monetary damages. Participant accordingly agrees to waive the defense in any action for injunctive relief or specific performance that a remedy at law would be adequate and that the Company, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to an injunction or to compel specific performance of Section 7 of this Agreement.
(b) In addition to any other remedy to which the Company may be entitled at law or in equity (including the remedy provided in the preceding paragraph), Participant hereby acknowledges and agrees that in the event of any breach of Section 7 of this Agreement, Participant shall be required to refund to the Company the value received by Participant upon exercise of the Stock Option measured by the amount that the Stock Value exceeds the Option Price paid on exercise of the Stock Option; provided, however, that the Company makes any such claim, in writing, against Participant alleging a violation of Section 7 of this Agreement not later than two years following Participant’s termination of Employment (three years in the event of a termination by reason of Retirement). For purposes of this Agreement, the “Stock Value” shall be the sale price of the Shares issued upon exercise of the Stock Option, if and to the extent such Shares were sold on the date of such exercise; otherwise, the “Stock Value” shall be the closing price of Shares as reported on the New York Stock Exchange (or such other exchange or facility as is determined by the Administrator if the Shares are not then traded on the New York Stock Exchange) on the date of the exercise of the Stock Option.
6
7
The Company makes no representations to Participant with respect to the tax treatment of any amount paid or payable pursuant to this Award. While this Award is intended to be interpreted and operated to the extent possible so that any such amounts shall be exempt from the requirements of Section 409A, in no event shall THG be liable to Participant for or with respect to any taxes, penalties and/or interest which may be imposed upon any such amounts pursuant to Section 409A or any other federal or state tax law. To the extent that any such amount should be subject to Section 409A (or any other federal or state tax law), Participant shall bear the entire risk of any such taxes, penalties and or interest.
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IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the Grant Date.
THE HANOVER INSURANCE GROUP, INC. |
By:________________________________ |
Name: Denise Lowsley |
Title: EVP &CHRO |
|
|
___________________________________ |
<PARTICIPANT NAME> |
Exhibit 31.1
CERTIFICATION AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, John C. Roche, certify that:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 3, 2023 |
|
/s/ John C. Roche |
John C. Roche |
President, Chief Executive Officer and Director |
Exhibit 31.2
CERTIFICATION AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Jeffrey M. Farber, certify that:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
May 3, 2023 |
|
/s/ Jeffrey M. Farber |
Jeffrey M. Farber |
Executive Vice President and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as President, Chief Executive Officer and Director of The Hanover Insurance Group, Inc. (the “Company”), does hereby certify that to the undersigned’s knowledge:
/s/ John C. Roche |
John C. Roche |
President, Chief Executive Officer and |
Director |
Dated: May 3, 2023
Exhibit 32.2
CERTIFICATION PURSUANT TO
SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Executive Vice President and Chief Financial Officer of The Hanover Insurance Group, Inc. (the “Company”), does hereby certify that to the undersigned’s knowledge:
/s/ Jeffrey M. Farber |
Jeffrey M. Farber |
Executive Vice President and |
Chief Financial Officer |
Dated: May 3, 2023